Question

At the beginning of 2017, Wallace Corporation issued 10% bonds with a face value of $6,000,000. These bonds mature in the five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $5,558,400 to yield 12%. Wallace uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2017? (Round your answer to the nearest dollar.)

Answer 1

$669,018

Step-by-step explanation:

The computation of the interest expense reported is shown below:

Date Interest Payment Interest Amortization of Balance Book

(Face Value × Expense [B] Bond Discount value

Coupon Rate (A-B) of

× 1 ÷ 2) [A] Bonds

02-Jan-17 $441,600 $5,558,400

30-Jun-17 $300,000 $333,504 $33,504 $408,096 $5,591,904

(6,000,000 ×10% ×1 ÷ 2) ($5,558,400 × 12% ($441,600 - $33,504)

× 1 ÷ 2) (5,558,400 + 33504)

31-Dec-17 $300,000 $335,514

($6,000,000 × 10% ×1 ÷ 2) ($5,591,904 × 12% ×1 ÷ 2)

The total amount of interest expense is

= $333,504 + $335,514

= $669,018