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

Question

krupal patel · Accepted Answer

Final Answer : A, Explanation :  Interest expense under the effective interest method is calculated by multiplying the carrying amount of the bonds at the beginning of the period by the market interest rate. The carrying amount at the beginning is $690,960 (the price the bonds were sold for). The market interest rate is 8% annually, but since interest is calculated semi-annually, we use 4% (half of 8%). Thus, the interest expense for the first six months is $690,960 * 4% = $27,638.4, which rounds to $27,638.

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