Final answer:
The effective interest recognized on June 30, 20X1, for the bond issued by Meister Company at a discount with a 7% effective interest rate will be $6,709, which takes into account the amortization of the discount.
Step-by-step explanation:
The student is asking about how to calculate the effective interest on a bond issued at a discount. On January 2, 20X1, Meister Company issues $200,000 of 6% bonds with interest payable semi-annually on June 30 and December 31. Though the stated interest rate is 6%, the bonds were issued at a discount for $191,684 and with an effective interest rate of 7%. To find the effective interest recognized on June 30, 20X1, we will follow the steps to calculate the interest using the effective interest rate method.
First, we need to calculate the interest expense based on the effective interest rate of 7% for the first six months. We do this by multiplying the carrying amount of the bond ($191,684) by the semi-annual effective interest rate (7% / 2).
Interest Expense = Carrying amount of the bond × Semi-annual effective interest rate
Interest Expense = $191,684 × (7% / 2) = $191,684 × 3.5% = $6,709 (rounded to whole dollars)
The effective interest recognized on June 30, 20X1, will be $6,709, which exceeds the $6,000 cash interest paid, because the bonds were sold at a discount and the interest expense includes amortization of that discount.