Question

Merchant Company issued 10-year bonds on January 1. The 6% bonds have a face value of $727,000 and pay interest every January 1 and July 1. The bonds were sold for $604,217 based on the market interest rate of 7%. Merchant uses the effective interest rate method to amortize bond discounts and premiums. On July 1 of the first year, Merchant should record interest expense (rounded to the nearest dollar) of

Answer 1

Merchant Company

On July 1 of the first year, Merchant should record interest expense (rounded to the nearest dollar) of:

= $22,472.

Step-by-step explanation:

a) Data and Calculations:

Face value of bonds = $727,000

Price of bonds = 604,217

Discounts = $122,783

Period of bonds = 10 years

Coupon rate of interest = 6%

Market interest rate = 7%

Payment of interest = Semi-annually (Jan. 1 and July 1)

July 1:

Cash payment = $21,810 ($727,000 * 3%)

Interest based on market rate = 21,148 ($604,217 * 3.5%)

Discount amortization = $662

Interest expense = $22,472 ($21,810 + $662)