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24 August, 11:16

On January 1, 2021, Lyle's Limeade issues 3%, 20-year bonds with a face amount of $80,000 for $69,058, priced to yield 4%. Interest is paid semiannually. What amount of interest expense will be recorded in the December 31, 2021, annual income statement?

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  1. 24 August, 12:46
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    The interest expense of $2,765.94 is recorded in the annual income statement.

    Explanation:

    As the interest is paid semiannually, so the first interest will be in June, it is computed by using the method of effective interest rate:

    Interest expense = Amount * Rate / 2

    =$69,058 * 0.04 / 2

    = $1,381.16

    Now, Computing the amount of the above interest expense that amortizes the bond discount as:

    = Face value * issued at 3% / 2

    = 80,000 * 0.03 / 2

    = $1,200

    = $1,381.16 - $1,200

    = $181.16

    The difference is added to the carrying value of the bond which is:

    = Difference amount + Carrying amount

    = $181.16 + $69,058

    = $69,239.16

    The interest for 6 months ending on December 31 is computed as:

    = $69,239.16 * 0.04 / 2

    = $1,384.78

    Total interest expense at 12/31/12 would be:

    = June 30 expense + December 31 expense

    = $1,381.16 + $1,384.78

    = $2,765.94
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