Please how do i calculate this problem:
The Raymore Company issued 10-year bonds on January 1, 2007. The 15% bonds have a face value of $100,000 and pay interest every January 1 and July 1. The bonds were sold for $117,205 based on the market interest rate of 12%. Raymore uses the effective-interest method to amortize bond discount and premiums. On July 1, 2007, Raymore should record interest expense of?
To calculate the interest expense on July 1, 2007, we need to first determine the amount of interest that has accrued since the bonds were issued on January 1, 2007.
Here's how you can calculate it:
1. Determine the annual interest payment:
The face value of the bonds is $100,000, and they carry a coupon rate of 15%. Therefore, the annual interest payment is calculated by multiplying the face value by the coupon rate:
Annual interest payment = $100,000 * 15% = $15,000
2. Calculate the six-month (half-year) interest:
Since the bonds pay interest semi-annually, we need to calculate the interest for the six-month period from January 1, 2007, to July 1, 2007. Divide the annual interest payment by 2:
Six-month interest = $15,000 / 2 = $7,500
3. Determine the amortization of the bond discount:
The bonds were sold at a premium of $117,205, which means the issue price was higher than the face value. To find the bond discount, we need to subtract the face value from the issue price:
Bond discount = Issue price - Face value = $117,205 - $100,000 = $17,205
Since the company uses the effective-interest method to amortize bond discount, the discount is allocated over the life of the bonds. For the first interest payment, we only calculate the discount amortization for the first six months. Divide the bond discount by the number of periods in a year and multiply it by the number of periods elapsed:
Discount amortization = ($17,205 / 2) * 6/12 = $4,301.25
4. Calculate the interest expense on July 1, 2007:
To determine the interest expense, add the original six-month interest payment to the discount amortization:
Interest expense = Six-month interest + Discount amortization
= $7,500 + $4,301.25
= $11,801.25
Therefore, on July 1, 2007, Raymore should record interest expense of $11,801.25.