question archive On January 1, 2018, Carrow Company issued 10% bonds in the face amount of P1,000,000 that mature on January 1, 2028
On January 1, 2018, Carrow Company issued 10% bonds in the face amount of P1,000,000 that mature on January 1, 2028
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On January 1, 2018, Carrow Company issued 10% bonds in the face amount of P1,000,000 that mature on January 1, 2028.
The bonds were issued for P886,000 to yield 12%, resulting in bond discount of P114,000.
The entity used the interest method of amortizing bond discount. Interest is payable on January 1 and July 1.
For the year ended December 31, 2018, what amount should be reported as bond interest expense?
a. 106,510
b. 100,000
c. 53,160
d. 50,000
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Answer:
a .
Step-by-Step explanation
Under effective interest method, the interest expense is calculated as follows.
July 1.
Interest expense = Carrying value at the beginning of the period x Yield rate x time
Interest expense = P886,000 x 12% x 6/12 = P53,160
Interest payment = Face value x issued rate x time = P1,000,000 x 10% x 6/12 = 50,000
Amortization of discount = 53,160 - 50,000 = 3,160
Carrying value of the bond = P886,000 + 3,160 = P889,160
December 31.
Interest expense = P889,160 x 12% x 6/12 = 53,350
Total interest expense = 53,160 + 53,350 = P106,510
Option A is the answer.
