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13. Merchant Company issued 10-year bonds on January 1. The 7% bonds have a face value...

13. Merchant Company issued 10-year bonds on January 1. The 7% bonds have a face value of $741,000 and pay interest every January 1 and July 1. The bonds were sold for $615,853 based on the market interest rate of 8%. Merchant uses the effective interest method to amortize bond discounts and premiums. On July 1 of the first year, Merchant should record interest expense (round to the nearest dollar) of

a. $21,555

b. $29,640

c. $24,634

d. $25,935

Business   Accounting   
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Answer #1
The merchant should record interest expense on july 1 of first year as :
$615853*8%*6/12
24634.12
24634 (Rounded of to nearest dollar)
Since merchant uses effective interest method to amortise bond discounts & premiums we have to take $615853 current bond value along with effective interest rate for calculating interest expense.
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