Question

On January 1, 2017, Huber Co. sold 12% bonds with a face value of $2,000,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $2,154,500 to yield 10%. Using the effective-interest method of amortization, interest expense for 2017 isOn January 1, 2017, Huber Co. sold 12% bonds with a face value of $2,000,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $2,154,500 to yield 10%. Using the effective-interest method of amortization, interest expense for 2017 is:______

Answer 1

The interest expense for 2017 is $214,836

Step-by-step explanation:

Given data from the question;

face value of sold bonds = $2,000,000

Number of years the bond matures = 5 years

Interest paid semiannually of 10%; 5%

Amount later sold = $2,154,500

To yield = 10%

Using effective-interest method of amortization;

Interest expense = the effective-interest rate × the bond's carrying value for each period

= $2,154,500 × 5%

= $2,154,500 × 0.05

= $107,725

[$2,154,500 - ($120,000 - $107,725)] × 0.05

= $107,111

The interest expense for 2017 = $107,725 + 107,111

= $214,836