Question

On January 1, 2014, Huber Co. sold 12% bonds with a face value of $1,000,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $1,077,250 to yield 10%. Using the effective-interest method of amortization, interest expense for 2014 is ____.

Answer 1

$107,418.13

Step-by-step explanation:

Interest expense using the effective interest method = Part A + Part B

Where:

Part A = bonds' selling price x 6 months effective interest rate = $1,077,250 x 5% = $53,862.50

Part B = { bonds' selling price - [(face value x stated interest for 6 months) - (bonds' selling price x 6 months effective interest rate)]} x 6 months effective interest rate

= { $1,077,250 - [($1,000,000 x 6%) - ($1,077,250 x 5%)]} x 5% = [ $1,077,250 - ($60,000 - $53,862.50)] x 5% = ($1,077,250 - $6,137.50) x 5% = $1,071,112.50 x 5% = $53,555.63

Interest expense = $53,862.50 + $53,555.63 = $107,418.13