Ask Question
23 March, 19:44

On January 1, Anthony Corporation issued $1,000,000, 13%, 5-year bonds. The bonds sold for $1,100,596. This price resulted in an effective interest rate of 14% on the bonds. Interest is payable annually on January 1. Use the effective-interest method to determine the amount of interest expense for the first year.

+1
Answers (1)
  1. 23 March, 23:09
    0
    By using the effective interest method, the amount of interest expense for the first year would be $154,083.

    Explanation:

    Effective interest method is just another accounting practice which is used to takeout either interest rate or amount of interest expenses (as it is in this case), when a bond is sold at a discount or premium (as it is in this case).

    In the question it is give that bond is sold at premium as the face value was $1,000,000 but sold at premium of $1,100,596 with coupon rate of 5%.

    Formula we used to take out effect effective interest rate =

    Amount of interest expense / bond sold at premium

    But here we are not given interest expense but instead effective interest rate is given to us, so

    14% = amount of interest expense / $1,100,596

    Amount of interest expense = $1,100,596 x 14%

    = $154,083.44

    = $154,083 (approximately)
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “On January 1, Anthony Corporation issued $1,000,000, 13%, 5-year bonds. The bonds sold for $1,100,596. This price resulted in an effective ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers