Purpose: (L.O. 10) This exercise will illustrate the computations and journal entries for a bond when the effective-interest method of amortization is used.
The Jan Larsen Corporation issued bonds with the following details:
|Contractual interest rate||7%|
|Market interest rate||10%|
|Maturity date||January 1, 2017|
|Date of issuance||January 1, 2014|
|Interest payments due||Annually on January 1|
|Method of amortization||Effective-interest|
|End of annual reporting period||December 31|
SOLUTION TO EXERCISE 10-12
Explanation: Interest to be paid (stated interest) is determined by multiplying the face value ($100,000) by the contractual interest rate (7%). Interest expense is computed by multiplying the carrying value at the beginning of the interest period by the effective-interest rate (10%). The amount of discount amortization for the period is the excess of the interest expense over the stated interest ...