Question

Clio Co. issued 5-year $500,000 debenture bonds on January 2. The bonds pay interest semiannually. Clio uses the effective interest method to amortize bond premiums and discounts. The carrying value of the bonds on January 2 was $337,806. A journal entry was recorded for the first interest payment on June 30, debiting interest expense for $13,512 and crediting cash for $15,000. What is the annual stated interest rate for the debenture bonds?

a. 4%
b. 3%
c. 8%
d. 6%

Answer 1

d. 6%

Step-by-step explanation:

The computation of the annual stated interest rate for the debenture bonds is shown below:

= (Interest expense for the year ÷ issued amount of the debenture bond) × 100

where,

Interest expense for the year is

= $15,000 × 2

= $30,000

And, the issued amount is $500,000

So, the annual stated interest rate for the debenture bonds is

= $30,000 ÷ $500,000

= 6%