Question

The Merchant Company issued 10-year bonds on January 1. The 15% bonds have a face value of $100,000 and pay interest every January 1 and July 1. The bonds were sold for $117,205 based on the market interest rate of 12%. Merchant uses the effective interest method to amortize bond discounts and premiums. On July 1 of the first year, Merchant should record interest expense (round to the nearest dollar) of__________.

Answer 1

Answer:

Answer and Explanation:

A 15% interest is per annum and interest payable every 6 months on July 1 and January 1 would be 7.5% of the face value of the bond.

So, interest expense as on July 1, 2011

= (Face value of bond X Rate of interest) / 2

= ($100,000 X 15%) / 2

= $7,500

So, the Merchant Company should record interest expense of $ 7,500 on July 1, 2011

Explanation: