On January 1, year 1, Korn Co. sold to Kay Corp. $400,000 of its 10% bonds for $354,118 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Korn report as interest expense for the 6 months ended June 30, year 1? A. $21,247B. $20,000C. $17,706D. $24,000

A) $21,247

Explanation:

Since the bonds were sold at a discount in order for them to yield 12% interest rate instead of 10%, the issuing company (Korn Co.) must calculate the interest expense not using the face value of the bonds, instead it should use the market value and the true bond yield.

interest expense = bond market value x true bond yield x 6/12 = $354,118 x 12% x 0.5 = $21,247

B. $20,000

Explanation:

Interest on the bond is paid by the face value coupon and coupon rate of the bond. Face value is multiplied by the coupon rate to calculate yearly interest payment. to calculate semiannual payment divide the yearly payment by 2.

Interest payment = Face value x Coupon rate

Interest payment = $400,000 x 10%

Interest payment = $40,000 yearly

Interest payment = $40,000 / 2 = $20,000 semiannually