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31 August, 19:07

On January 1, a company issued 6%, 10-year bonds with a face amount of $60 million for $55,736,520 to yield 7%. Interest is paid semiannually. What was interest expense at the effective interest rate on June 30, the first interest date? (Enter your answers in whole dollars. Round percentage answers to 1 decimal place (e. g., 0.0234 should be entered as 2.3).)

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  1. 31 August, 22:14
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    Effective interest on June 30 on a 6% $60 million bond at 7% effective rate is $1,950,778

    The interest is treated in the books of account thus:

    Debit interest expense $1,950,778

    Credit Bond account $1,950,778

    Explanation:

    The effective interest is computed using the below formula

    Amount x Effective Rate (%) = Interest Expense

    Amount=$55,736,520

    Effective rate = 7%/2 = 3.5% semi-annually

    Interest expense=$55,736,520*3.5%

    Interest expense=$1,950,778
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