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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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In 2019, Drew Company issued $200,000 of bonds for SI 89,640. If the stated rate of interest was 6% and the yield was 6.73%, how would Drew calculate the interest expense for the first year on the bonds using the effective interest method?

  1. $1 89,640 x 8%
  2. $189,640 x 6.73%
  3. $200,000 x 8%
  4. $200,000 x 6,73%

To determine

Concept introduction:

Bonds:

Bonds are debt instruments issued by the borrower company to its lenders. Bonds are issued at a specified rate of interest and for a specified time period. The bondholders get a fixed rate of interest on the bonds and repayment of the bonds at the maturity date. Bonds may be issued at a premium or discount. The premium or discount on issue of bonds is amortized or the life of bonds using the straight line or effective rate methods.

To calculate:

The interest expense for the first year using the effective interest rate method.

Explanation

Under the effective interest rate method, the interest expense is calculated using the following formula:

Interest Expense = Carrying value of the...

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