Question

(b) Bonita Inc. issued $610,000 of 9%, 10-year bonds on June 30, 2020, for $505,047. This price provided a yield of 12% on the bonds. Interest is payable semiannually on December 31 and June 30. If Bonita uses the effective-interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2020. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548.)

Interest expense to be recorded

$ 115800 WRONG

Answer 1

Interest expense on October 31, 20x7 505047*12%*4/12= 20,201.88

Answer 2

Carrying value of bonds on June 30, 2020 = $505,047

Market interest rate = 12%

From June 30, 2020 to October 31, 2020, there are 4 months.

Interest expense to be recorded on October 31, 2020 = Carrying value of bonds on June 30, 2020 x Market interest rate x 4/12

= 505,047 x 12% x 4/12

= $20,202

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