[teonguyen]

On January 1, 2004, Graves Inc sold a $1,000,000, 8%, 10 year semi-annual bond to the public for $934,960 yielding 9%. Determine the interest expense Graves will report on June 30, 2004..

Here this is my answer , but compare to the result it s not right,,Please help ,, thanks a lot

Interest paid annually : 1,000,000 * 8% = 80,000$
40,000 $ will be paid every 6 months (80,000 /2)

The bond was sold on discount since state rate was lower than market rate
Discount on bondpayable = 1,000,000 - 934,960 = $65,040

65,040 $ will be spread over 10 years = 6,504$ (each year).Then 3,252 $ for every 6 months

Journal entry to record interest expense on June 30 2004

Interest expense $43,252
Discount on Bond payable 3,252
Cash 40.000

But the answer shows the Interest Expense $42,073,, Please help , maybe I missed something important

[teonguyen]

I'm sorry not to post the Journal entry properly..
Journal
Dr Interest Expense $43,252
Cr Discount on Bondayble 3,252
Cr Cash 40.000

[morgaine300]

You used straight-line and they've used effective interest method. It doesn't say so, so you either didn't copy that part from the problem or the instructions, or they want you to assume it.

Interest at market rate on carrying value:
$934,960 x .045 = 42,073
actual interest = 40,000

difference of 2073 is the amortization

That's the first payment. When you go to do the next one, you must add the amortization to the carrying value to get a new one:
934,960 + 2073 = 946,033
Carrying value will work its way towards face value.
You then repeat this process with the new carrying value.

[teonguyen]

Thanks Morgaine for the help, now I know what I need to study. I think they want me to assume what method I should use, there is no more information in this question, that was all they gave me..