Question

On January 1 of the current year, Feller Corporation issued $6,000,000 of 10% debenture bonds on...

On January 1 of the current year, Feller Corporation issued $6,000,000 of 10% debenture bonds on a basis to yield 9%, receiving $6,269,160. Interest is payable annually on December 31 and the bonds mature in 6 years. The effective-interest method is used.

What is the interest expense for the first year?

What is the interest expense for the second year?

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Answer #1

(a) What is the interest expense for the first year?

Solution: $6269160 * 9% = $ 564224.4 (Answer)

(B) What is the interest expense for the second year?

First of all, we have to determine the premium amortization in the first financial year. It is calculated as follows:-

Solution: $600000 - $ 564224.4 = $ 35775.6 ( Premium Amortization in the first year )

Here, $600000 ( $6000000*10%)

Now,

The book value of bonds at the begging of the second year = $ 6269160 - $35775.6 = $ 6233384.4

Now, Interest expense for the second year = $ 6233384.4 * 9% = $ 561004.596 (Answer)

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