Question

One July 1, 2015, Clayton Company issued $2,000,000 of zero-interest bonds. The bonds were scheduled to...

One July 1, 2015, Clayton Company issued $2,000,000 of zero-interest bonds. The bonds were scheduled to mature on December 31, 2023 and were priced to earn investors a 14% effective yield. Interest accrues semi-annually. What is the amount of interest expense Clayton will recognize for the calendar year 2016? Please Explain.

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Answer #1

Solution:

Face value of bonds = $2,000,000

Period to bond maturity = 8.5 years

Nos of semiannual period = 8.5*2 = 17

Effective yield = 14%, 7% semiannual

Issue price of bond = $2,000,000 * PV factor at 7% for 17th period

= $2,000,000 * 0.31657

= $633,149

Bond Amortization schedule (Partial)
Date Interest expense Carrying Value
1-Jul-15 $633,149
31-Dec-15 $44,320 $677,469
30-Jun-16 $47,423 $724,892
31-Dec-16 $50,742 $775,635

Amount of interest expense Clayton will recognize for the calendar year 2016 = $47,423 + $50,742 = $98,165

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