Homework Answers
The correct answer is Option 2 - credit to discount on bonds payable $81043
Notes
When a company uses effective interest method:
Cash paid is always calculated as Face Value * Coupon Rate = 8250000*6%= $495000
Interest expense is always calculated as Issue price * Market rate = 7125500*8% = $570040
Discount written off in year 1 = Interest expense - cash paid = 570040-495000 = $75040
Carrying value of bonds at year 1 = 7125500+75040 = 7200540
Year 2
Cash paid = 495000
Interest expense = 7200540*8% = 576043
Discount = $81043
Please comment in case of any issue and I will be happy to help.
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