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9 October, 13:09

On January 1, 2020, TigerKing Corp. issued $930,000 face value, 6%, 5 year bonds. The bond interest is paid on June 30 and December 31. The bonds sold for $1,013,538. When the bonds were sold, the effective rate of interest was 4%. Under the effective-interest method, what formula would you use to calculate total interest expense?

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  1. 9 October, 13:32
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    the formulas used to calculate the interest expense:

    interest amortization = (bond's market price or carrying value x effective interest) - (bond's face value x coupon rate) = premium on bonds payable (it is negative, so you must debit it)

    interest expense = coupon rate + premium on bonds

    in this case, the interest expense used to record the first and second coupon payments:

    first coupon payment

    ($1,013,538 x 2%) - ($930,000 x 3%) = $20,271 - $27,900 = - $7,629

    interest expense = $27,900 - $7,629 = $20,271

    June 30, 2020

    Dr Interest expense 20,271

    Dr Premium on bonds payable 7,629

    Cr Cash 27,900

    second coupon payment

    ($1,005,909 x 2%) - ($930,000 x 3%) = $20,118 - $27,900 = - $7,782

    interest expense = $27,900 - $7,782 = $20,118

    June 30, 2020

    Dr Interest expense 20,118

    Dr Premium on bonds payable 7,782

    Cr Cash 27,900
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