Question

On january 1, 2019, a company issued $400,000 of 10-year, 12% bonds. The interest is payable semiannually on june 30 and december 31. The issue price was $413,153 based on a 10% market interest rate. The effective-interest method of amortization is used

Answer 1

The interest expense for the six-month period ending December 31, 2019 is closest to: $20658

How to use the effective-interest method of amortization?

We are given;

Total price of bond = $400,000

Duration of bonds = 10 year

Interest rate on bond = 12%

Issue price on bond = $413,153 at 10% market rate

The calculation for interest expense for 6 months is;

Issue Price * Market rate of Interest * (number of months for interest/(number of months a year)

= 413153 * 10% * (6/12) ≈ $20658

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