Question

Brief Exercise 9-13 Calculate Interest expense (L09-5) On January 1, 2021, Lyle's Limende issues 4%, 10-year bonds with a face amount of $84,000 for $77,453.priced to yleld 5%. Interest is pald semiannually What amount of Interest expense will be recorded in the December 31, 2021, annual Income statement? (Do not round your Intermediate calculations. Round your final answer to nearest whole dollar amount.)

Answer 1

Since the question is done on effective interest rate method kindly note the following

Note : - 1) The coupon rate means the rate specified for payment of interest on the face of bond

               2) The Effective interest rate means the Yield rate.

The liability of the bond payable A/c = face value = $ 84,000 credit balance

The bond discount amount A/c = Face value – issue price = 84000 – 77453 = 6547 debit balance

So the net book value of the bond = $ 77,453

For 1^st half of the year : -

The interest expense = (net book value of bond)*(effective interest rate)*1/2

                                      = 77453*5%*(1/2)

                                      = 1936.325

Actual interest paid = (Face value of bond)*(coupon rate)*1/2

                                    = 84000*4%*(1/2)

                                    = 1680

Therefore, the discount amount that is being amortized = (interest expense) – (Interest paid)

                                        = 1936.325 – 1680

                                        = 256.325

So the interest expense is debited by crediting the Cash A/c for $ 1,680

And also by crediting the bond discount A/c for $ 256.325

2^nd Half of the year :-

After the above entry, the beginning of the 2^nd half of the year will be :-

The face value = 84,000 credit balance

The discount on bond = 6,547-256.325 = 6,290.675 debit balance

So the net book value = 84000 – 6290.675 = 77,709.325

The interest expense for the 2^nd year = (net book value)*(effective interest rate)*1/2

                                                                   = 77709.325*5%*(1/2)

                                                                   = 1942.733125

Therefore,total interest expense for the year = interest expense for 1^st half + interest expense for 2^nd half

                                                  = 1936.325+1942.733125

                                                  = 3879.058125

                           So the interest expense = $ 3,879 (rounded off to nearest whole dollar amount)

Note : for easy understanding purpose the variables in formula are written and explained not exactly what variables given in the question. Like I have used E(s) for expectation of foreign rate but in question it is mentioned as E(t+1).

And in few places, the domestic currency is quoted as home currency . we know that both are same

And 3% = 0.03, 2% = 0.02, 5% = 0.05, 10% = 0.1

Since the question is done on effective interest rate method kindly note the following

Note : - 1) The coupon rate means the rate specified for payment of interest on the face of bond

               2) The Effective interest rate means the Yield rate.

The liability of the bond payable A/c = face value = $ 84,000 credit balance

The bond discount amount A/c = Face value – issue price = 84000 – 77453 = 6547 debit balance

So the net book value of the bond = $ 77,453

For 1^st half of the year : -

The interest expense = (net book value of bond)*(effective interest rate)*1/2

                                      = 77453*5%*(1/2)

                                      = 1936.325

Actual interest paid = (Face value of bond)*(coupon rate)*1/2

                                    = 84000*4%*(1/2)

                                    = 1680

Therefore, the discount amount that is being amortized = (interest expense) – (Interest paid)

                                        = 1936.325 – 1680

                                        = 256.325

So the interest expense is debited by crediting the Cash A/c for $ 1,680

And also by crediting the bond discount A/c for $ 256.325

2^nd Half of the year :-

After the above entry, the beginning of the 2^nd half of the year will be :-

The face value = 84,000 credit balance

The discount on bond = 6,547-256.325 = 6,290.675 debit balance

So the net book value = 84000 – 6290.675 = 77,709.325

The interest expense for the 2^nd year = (net book value)*(effective interest rate)*1/2

                                                                   = 77709.325*5%*(1/2)

                                                                   = 1942.733125

Therefore,total interest expense for the year = interest expense for 1^st half + interest expense for 2^nd half

                                                  = 1936.325+1942.733125

                                                  = 3879.058125

                           So the interest expense = $ 3,879 (rounded off to nearest whole dollar amount)