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The Designer Company issued 10-year bonds on January 1. The 6% bonds have a face value of $800,000 and pay interest every January 1 and July 1. The bonds were sold for $690,960 based on the market interest rate of 8%. Designer uses the effective interest method to amortize bond discounts and premiums. On July 1, of the first year, Designer should record interest expense (round to the nearest dollar) of __________.A) $27,638 B) $24,000 C) $48,000 D) $55,277

Respuesta :

Answer: B. $24000

Explanation:

Bonds Face Value = $800 000

Coupon Rate = 6% per annum

coupon Payments = $800 000 x 6/100 x 6/12 = $24000

Coupon Payments are interest Payments because they represent what the company pays to the Bond holders each year which is similar to interest payments a company wound make if company acquired a loan from a bank for a example.

Designer Company Makes Coupon Payments twice a year or semi-annually. Coupon payment of $24000 would be made every 6 months (every 1 January and 1 July of the year).

Designer Company would record interest expense of $24000 on July 1 of the first year.

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Answer:

A) $27,638

Explanation:

Given that:

Face value of bonds                      $800000

Bonds price                                    $690960

Market interest rate                        8% = 0.08

To calculate the interest expense of Designer on July 1 of the first year(the period from January 1 to July 1 is half of a year), we use an interest of 4% (0.04)  which is half of the effective interest rate.

Therefore, the interest expense = bond price × interest = $690960 × 0.04 = 27638.4 = 27638 (to nearest dollar)

The interest expense is $27638

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