On January 1, 2018, Huff Co. sold $5,000,000 of its 10% bonds for $4,426,480 to yield 12%....

Question:

On January 1, 2018, Huff Co. sold $5,000,000 of its 10% bonds for $4,426,480 to yield 12%. Interest is payable semiannually on January 1 and July 1.

What amount should Huff report as interest expense for the twelve months ended December 31, 2018?

Interest Expense:

Interest expense refers to the expenses that a business pays for using borrowed money. In other words, it is a representation for the interest for loans and bonds.

Answer and Explanation:

The answer is $ 532,113

Calculation:

Discount on bonds payable is = 5,000,000 - 4,426,480 = 573,520

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1st payment:

Calculating interest expense = Carrying value x rate x 6/12 = 4,426,480 x 12% x 0.5 = 265,589

The cash semiannual payment is = FV x interest rate x 6/12 = 5,000,000 x 10% x 0.5 = 250,000

Amortization of discount = Interest expense - Interest paid = 265,589 - 250,000 = 15,589

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2nd payment:

The interest expense is = Carrying value x rate x 0.5 = (5,000,000 - (573520 - 15589)) x 12% x 6/12 = 266,524.

Interest payment = 250,000

Amortization = 266,524 - 250000 = 16,524

Therefore, the total interest expense is 265,589 + 266,524 = 532,113


Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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