On January 1, 2024, Lyle's Limeade issues 4%, 10-year bonds with a face amount of $81,000 for $74,686, priced to yield 5%. Interest is paid semiannually.What amount of interest expense will be recorded in the December 31, 2024, annual income statement? (Do not round your intermediate calculations. Round your final answer to nearest whole dollar amount.)
Question
On January 1, 2024, Lyle's Limeade issues 4%, 10-year bonds with a face amount of 74,686, priced to yield 5%. Interest is paid semiannually.What amount of interest expense will be recorded in the December 31, 2024, annual income statement? (Do not round your intermediate calculations. Round your final answer to nearest whole dollar amount.)
Solution
To calculate the interest expense that will be recorded in the December 31, 2024, annual income statement, we need to follow these steps:
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First, we need to calculate the semiannual yield, which is the annual yield divided by 2. The annual yield is 5%, so the semiannual yield is 5% / 2 = 2.5%.
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Next, we need to calculate the semiannual interest payment. This is the face amount of the bond multiplied by the stated interest rate, divided by 2. The face amount of the bond is 81,000 * 4% / 2 = $1,620.
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Then, we need to calculate the interest expense for each semiannual period. This is the carrying amount of the bond at the beginning of the period multiplied by the semiannual yield. The carrying amount of the bond at the beginning of the period is the issue price, which is 74,686 * 2.5% = $1,867.15.
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Finally, we need to calculate the total interest expense for the year. This is the interest expense for each semiannual period multiplied by 2. So, the total interest expense for the year is 3,734.30.
Therefore, the amount of interest expense that will be recorded in the December 31, 2024, annual income statement is $3,734.
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