Question

On January​ 1, 2020, TigerKing Corp. issued $930,000 face value, 6%, 5 year bonds. The bond interest is paid on June 30 and December 31. The bonds sold for $1,013,538. When the bonds were sold, the effective rate of interest was 4%. Under the effective-interest method, what formula would you use to calculate total interest expense?

Answer 1

the formulas used to calculate the interest expense:

interest amortization = (bond's market price or carrying value x effective interest) - (bond's face value x coupon rate) = premium on bonds payable (it is negative, so you must debit it)

interest expense = coupon rate + premium on bonds

in this case, the interest expense used to record the first and second coupon payments:

first coupon payment

($1,013,538 x 2%) - ($930,000 x 3%) = $20,271 - $27,900 = -$7,629

interest expense = $27,900 - $7,629 = $20,271

June 30, 2020

Dr Interest expense 20,271

Dr Premium on bonds payable 7,629

Cr Cash 27,900

second coupon payment

($1,005,909 x 2%) - ($930,000 x 3%) = $20,118 - $27,900 = -$7,782

interest expense = $27,900 - $7,782 = $20,118

June 30, 2020

Dr Interest expense 20,118

Dr Premium on bonds payable 7,782

Cr Cash 27,900