Question

"On January 1, Melrose Manufacturing issues a 5-year bond with a face value of $10,000 and a stated interest rate of 9%. The market interest rate is 7%. The issue price of the bond was $10,886. Using the effective-interest method of amortization, the interest expense for the first year ended December 31 would be:"

Answer 1

$762.02

Step-by-step explanation:

A bond is issued on premium if it is issued at a price more than the face value of the bond. The premium value is amortized over the period of bond.

As per given data

Face value of Bond = $10,000

Stated Interest rate = 9%

Market Interest rate = 7%

Issuance price = $10,886

Using effective interest rate method the interest expense is calculated by multiplying the issue price to the market interest rate.

Interest Expense = $10,886 x 7% = $762.02

Answer 2

The interest expense for the year 31st December year 1 is $762.02

Step-by-step explanation:

The cash realized from the bond issue is $10,886,which implies that cash account would be debited with $10,886 and bonds payable account would be credited with same.

However,computing the interest expense is simply a matter of multiplying the cash proceeds by the market interest rate of 7% while the coupon payment equals face value of the bond multiplied by the coupon rate.

Interest expense=$10,886*7%=$762.02