On June 30, 2021, Moran Corporation issued $4 million of its 8% bonds for $3.5 million. The bonds were priced to yield 9.4%. The bonds are dated June 30, 2021. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the six months ended December 31, 2021?
Multiple Choice
$3,500.
$4,500.
$4,800.
$9,000.
Solution:
Semiannual interest paid on 31.12.2021 = $4,000,000*8%*6/12 = $160,000
Effective interest expense on 31.12.2021 = $3,500,000 * 9.4% * 6/12 = $164,500
Bond discount to be reduced for 6 months ended 31.12.2021 = $164,500 - $160,000 = $4,500
Hence 2nd option is correct.
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Bond discount to be reduced = (3,500,000*9.4*1/2) - (4,000,000*8%*1/2) = 164,500 - 160,000 = 4500 Option B is the answer |
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On June 30, 2021, Moran Corporation issued $4 million of its 8% bonds for $3.5 million....