Question

On July 1, 2010 a semi-annual $800,000 5 year bond with contractual (or coupon) rate of 10% had a Net book value of $704,171. The bond had been issued at a discount rate of 16% and matures on December 31, 2012. The total interest expense recorded on June 30, 2011 (rounded) would be:

The answer is $57,640

I need a step by step show of how this is done and why each step is the way that it is. Please prep me for the exam. Please make everything clear.

Answer 1

• Yes the correct answer is $ 57,640 Interest expense on 30 June 2011

Date	Cash payment	Interest expense	Discount on Bonds payable	Carrying Value of Bond
1 Jul 2010			$               95,829.00	$                    704,171.00
31 Dec 2010	$                  40,000.00	$            56,333.68 [$704171 x 16% x 6/12]	$             (16,333.68)	$                    720,504.68
30 June 2011	$                  40,000.00	$            57,640.37 or $ 57,640 ANSWER [$720,505 x 16% x 6/12]	$             (17,640.37)	$                    738,145.05