Auerbach Inc. issued 8% bonds on October 1, 2018. The bonds have a maturity date of September 30, 2028 and a face value of $375 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2019. The effective interest rate established by the market was 10%. Assuming that Auerbach issued the bonds for $328,266,900, what interest expense would it recognize in its 2018 income statement?
Issue price of bonds = $328,266,900
Market interest rate = 10%
Date of issue = Oct 1, 2018
For the year ending Dec 31, 2018, interest expense will be recognized for 3 months from Oct 1 to Dec 31.
Interest expense = Issue price of bonds x Market interest rate Time period
= 328,266,900 x 10% x 3/12
= $8,206,672.5
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