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On January 1, 2019, XYZ Co
On January 1, 2019, XYZ Co. issued 2-year bonds with a face value of $10,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield (Market Int.) 9%, at a selling price of $10,179.
The interest expense recognized for the year 2019 is
a.
$734.
b.
$914.
c.
$826.
d.
$None.
Expert Solution
Answer
Correct answer is b.$914
When bond is issued on yield to market at price of $10,179, interest is charged on outstanding amount of $10,179 @ of 9%.
So interest charged on June 30 is @9% for 6 months on $10,179
Interest expense=$10,179*9%*6/12
Interest expense for 6 months =$458
Cash paid for interest is however at stated interest rate of 10% on $10,000 for 6 months=$10,000*10%*6/12
Cash paid=$500
Difference of interest paid and interest expense is debited to bonds payable balance so bonds payable balance outstanding is reduced.
Bonds payable outstanding reduced=$500-$458
=$42
Bonds payable outstanding balance as on june 30=$10,179-$42
=$10,137
Now interest for last 6 months in 2019 is charged on $10,137 @9%
Interest expense from June 30 to December 31=$10,137*9%*6/12
Interest expense=$456
Total interest expense for 2019=$456+458
=$914
So,total interest expense charged for 2019=$914
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