Question

At the beginning of 2017, the octo company issued 10% bonds with a face value of $3,000,000. these bonds mature in the five years, and interest is paid semiannually on june 30 and december 31. the bonds were sold for $2,779,200 to yield 12%. octo uses a calendar-year reporting period. using the effective-interest method of amortization, amount of interest expense that should be reported for 2017 is

Answer 1

$334,509.12

Step-by-step explanation:

When using Effective Interest Method,

Interest Expense = Carrying value of Bond × Market yield interest rate.

Semi annual Cash interest:

= $3,000,000 × 10% × 6/12

= $150,000

2017 Interest Expense:

Interest Expense for first semi annual payment:

= $2,779,200 × 12% × 6/12

= $166,752

[Hence, Discount amortized = $166,752 - $150,000 = $16,752]

Interest expense for second semi annual payment:

= ($2,779,200 + $16,752) × 12% × 6/12

= $167,757.12

Therefore, the amount of interest expense that should be reported for 2017:

= $166,752 + $167,757.12

= $334,509.12