Question

On June 30, 2021, Mabry Corporation issued $5 million of its 8% bonds for $4.6 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2021. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the 6 months ended December 31, 2021?

Answer 1

$30,000

Step-by-step explanation:

The computation of the amount of bond discount reduced is shown below:

= Interest expense for 6 months - coupon interest payment for 6 months

where,

Interest expense for 6 months is

= $4,600,000 × 10% × 6 months ÷ 12 months

= $230,000

And, the coupon interest payment for 6 months is

= $5,000,000 × 8% × 6 months ÷ 12 months

= $200,000

So the amount of bond discount reduced is

= $230,000 - $200,000

= $30,000

The interest is paid semiannually so we considered the 6 months