On January 2, 2020, a calendar-year corporation sold 8% bonds with a face value of $2510000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $2316000 to yield 10%. Using the effective-interest method of computing interest, how much should be charged to interest expense in 2020

$231,600

Explanation:

In effective interest rate method, the interest expense is calculated on the the beginning Book value of the bond and market interest rate. Deducting the coupon payment from this value we get the amortization value of discount given on the issuance of bond

Interest Expense = Book value of the bond x Market rate = $2,316,000 x 10% = $231,600

Coupon Payment = Face value x coupon rate = $2,510,000 x 8% = $200,800

Discount Amortization = Interest Expense for the period - Coupon Payment = $231,600 - $200,800 = $30,800

$200,800 interest will be paid, Discount will be amortized by $30,800, and total expense of $231,600 will be charged as interest expense.

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