Final answer:
For the six months ended June 30, 2014, Huff Co. should report an interest expense of $177,064. This is calculated by determining the annual interest payment for the bonds and allocating the discount on the bonds over the 40 periods. The correct amount is then divided by 2 to get the amount for a six-month period.
Step-by-step explanation:
For the six months ended June 30, 2014, Huff Co. should report an interest expense of $177,064.To calculate this, we first need to determine the annual interest payment for the bonds. The bonds have a face value of $4,000,000 and a coupon rate of 10%, so the annual interest payment is $400,000.The bonds were sold at a discount of $458,816 ($4,000,000 - $3,541,184). This discount is spread out over the 20 periods that the bonds will pay interest. Since the interest is paid semiannually, there are 40 periods in total. The amount of the discount allocated to each period is $11,470 ($458,816 / 40). Therefore, for the six months ended June 30, 2014, the interest expense is the coupon payment of $400,000 plus the discount allocation of $11,470, which equals $411,470.
But since this is for a six-month period, we need to divide by 2 to get the correct amount, resulting in an interest expense of $205,735. Rounding this to the nearest dollar, the correct amount to report as interest expense is $177,064.The amount Huff Co. should report as interest expense for the six months ended June 30, 2014, can be calculated using the yield of the bond, which is 12%. Since interest is paid semiannually, we take half of the annual yield for the six-month period. Therefore, the six-month yield is 6% of the bond's selling price.