On June 30, 2013, Hardy Corporation issued $12.5 million of its 12% bonds for $1

Question

On June 30, 2013, Hardy Corporation issued $12.5 million of its 12% bonds for $11.4 million. The bonds were priced to yield 14%. The bonds are dated June 30, 2013, and mature on June 30, 2020. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the six months ended December 31, 2013?

On June 30, 2013, Hardy Corporation issued $12.5 million of its 12% bonds for $11.4 million. The bonds were priced to yield 14%. The bonds are dated June 30, 2013, and mature on June 30, 2020. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the six months ended December 31, 2013?

Explanation / Answer

Bond Discount at the time of issue = 12.5 Million - 11.4 Million = 1,100,000

Interest is payable in cash = 12,500,000*12%*1/2 = 750000

Interest Expenses to be recorded using effective interest method than:

Interest Expenses for the six months ended December 31, 2013 = 11400000 * 14%*1/2 = 798000

Bond discount be reduced for the six months ended December 31, 2013 = Interest Expenses for the six months ended December 31, 2013 - Interest is payable in cash

Bond discount be reduced for the six months ended December 31, 2013 = 798000 - 750000

Bond discount be reduced for the six months ended December 31, 2013 = $ 48000

Answer

b) $48,000

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