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3 September, 22:52

On January 1, Year 1, Willette Company sold $240,000 of 6% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were issued for $180,181, priced to yield 10%. What is the amount of effective interest expense that should be recorded for the six months ended June 30, Year 1

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  1. 3 September, 23:15
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    Answer: $9,009

    Explanation:

    To find the Effective Interest Rate, you should convert the stated interest rate into a semi-annual interest rate as that is when interest is payable.

    Effective interest Rate = 10% Per annum

    = 10/2

    = 5%

    5% is to be paid Semi-annaully.

    Interest Expenses for the first 6 months is therefore,

    = Issue Price * effective interest rate

    = 180,181 * 5%

    = $9,009

    $9,009 is the amount of effective interest expense that should be recorded for the six months ended June 30, Year 1.
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