Question

On June 30, 2018, Mabry Corporation issued $15 million of its 8% bonds for $13.8 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2018. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the 6 months ended December 31, 2018? a. $48,000 b. $60,000 c. $69,000 d. $90,000

Answer 1

Mabry Corporation

Using the effective interest method, the bond discount should be reduced for the 6 months ended December 31, 2018 by:

= d. $90,000

Step-by-step explanation:

a) Data and Calculations:

Face value of bonds issued = $15 million

Issue price of the bonds = 13.8 million

Bonds discounts = $1.2 million

Coupon rate of interest = 8%

Effective interest rate = 10%

Interest payment = semi-annually on December 31 and July 1

December 31, 2018:

Interest payment = $600,000 ($15 million * 4%)

Interest expense = $690,000 ($13.8 million * 5%)

Amortization of discounts = $90,000 ($690,000 - $600,000)

Fair value of bonds = $13.89million ($13.8m + $90,000)