Question

On January 1, 2018, Charlie Co. received $308,000 for bonds with a face amount of $320,000. The stated rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest expense is recognized by Charlie Co. in 2018__________ (assume annual interest payments and amortization)?

Answer 1

$30,800

Step-by-step explanation:

Data provided in the question:

Carrying value of bond = $308,000

Face value = $320,000

Interest rate = 8% = 0.08

Market rate = 10% = 0.10

Now,

Interest expense to be recognized in 2018

= ( Bond carrying value ) × ( Market rate of interest )

or

Interest expense to be recognized in 2018 = $308,000 × 10%

or

Interest expense to be recognized in 2018 = $30,800