Robinson, Incorporated, issues 6%, 10-year bonds with a face amount of $1 million on January 1, Year 1, for $1,077,946, when the market rate of interest is 5%. Interest is paid semiannually on June 30 and December 31. Interest expense associated with this bond for the first semiannual period is:Multiple Choice$25,000$32,338$30,000$26,949
Question
Robinson, Incorporated, issues 6%, 10-year bonds with a face amount of 1,077,946, when the market rate of interest is 5%. Interest is paid semiannually on June 30 and December 31. Interest expense associated with this bond for the first semiannual period is:Multiple Choice32,33826,949
Solution
To calculate the interest expense for the first semiannual period, we need to apply the market interest rate to the carrying amount of the bond at the beginning of the period.
Here are the steps:
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The market interest rate is 5% annually, but interest is paid semiannually, so we need to divide the annual rate by 2 to get the semiannual rate. 5% / 2 = 2.5%.
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The carrying amount of the bond at the beginning of the period is the price it was issued for, which is $1,077,946.
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Multiply the carrying amount by the semiannual interest rate to get the interest expense for the first semiannual period. 26,948.65.
So, the closest answer to the interest expense associated with this bond for the first semiannual period is $26,949.
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