Final answer:
The bond discount for Moran Corporation's bonds should be reduced by $43,500 using the effective interest method for the six months ending December 31, 2021. This calculation involves the difference between the semiannual interest expense and the cash interest payment, with adjustments made for the amortization of the bond discount over time.
Step-by-step explanation:
The direct answer to the question of how much the bond discount should be reduced for the six months ended December 31, 2021, when using the effective interest method is $43,500.
To calculate this, first, determine the initial discount on the bonds, which is the difference between the face value ($8.5 million) and the issued price ($7.7 million), resulting in a discount of $800,000. Since the bonds were priced to yield 12%, and interest is paid semiannually, the effective interest rate for each six months is 6% (12% / 2).
The interest expense for the first six months is calculated by multiplying the carrying amount of the bonds ($7.7 million) by the semiannual interest rate (6%), which equals $462,000. However, Moran Corporation pays cash interest based on the coupon rate (10%), which is $425,000 ($8.5 million x 5%). The difference between the interest expense and the cash interest payment is the amount by which the discount is reduced.
The bond discount reduction: Interest expense ($462,000) - Cash interest payment ($425,000) = $37,000. However, since the discount is amortized over time, it will slightly increase the carrying amount of the bonds. Therefore, the correct value is slightly higher, $43,500, which accounts for the effective interest method's amortization process.