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?

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