Question

On Jan 1 2020, Ethan Corporation issued 12% bonds with a face value of $4,000,000. These bonds mature in ten years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $4,498,490 to yield 10%. Ethan uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2020

Answer 1

Ethan Corporation

Using the effective-interest method of amortization, the amount of interest expense that should be reported for 2020 is:

= $449,096

Step-by-step explanation:

a) Data and Calculations:

Face value of bonds issued = $4,000,000

Issue price of the bonds = 4,498,490

Premium on the bonds = $498,490 ($4,498,490 - $4,000,000)

Coupon interest rate = 12%

Effective interest rate = 10%

Interest payments = June 30 and December 31

June 30:

Cash payment for bond interest = $240,000 ($4,000,000 * 6%)

Interest expense = 224,925 ($4,498,490 * 5%)

Amortization of bond premium = $15,075 ($240,000 - $224,925)

Bonds value = $4,483,415 ($4,498,490 - $15,075)

December 31:

Cash payment for bond interest = $240,000 ($4,000,000 * 6%)

Interest expense = 224,171 ($4,483,415 * 5%)

Amortization of bond premium = $15,829 ($240,000 - $224,171)

Bonds value = $4,467,586 ($4,483,415 - $15,829)

Interest expense for 2020 = $449,096 ($224,925 + $224,171)