Question

On January 1, 2014, Simmons Company sold to Flay Corporation $400,000 of its 10% bonds for $354,118 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Simmons report as interest expense for the six months ended December 31, 2014?

Answer 1

$21,322

Step-by-step explanation:

The computation of the interest expense for the six months ended December 31, 2014 is shown below:

On January 1

The face value of the bond = $400,000

Carrying value of the bond = $354,118

So, unamortized discount is $45,882 ($400,000 - $354,118)

On July 1

The interest expense = $21,247 ($354,118 × 12%) ÷ 2

The interest payment = $20,000 ($400,000 × 10%) ÷ 2

So, the discount amortized is

= $21,247 - $20,00

= $1,247

The face value = $400,000

The unamortized discount is $44,635 ($45,882 - $1,247)

The carrying value of the bond $355,365 ($400,000 - $44,635)

On December 31,2014

The interest expense = $21,322 ($355,365 × 12%) ÷ 2

The interest payment = $20,000 ($400,000 × 10%) ÷ 2