At the beginning of 2017 Waterway Industries issued 10 bonds

At the beginning of 2017, Waterway Industries issued 10% bonds with a face value of $5500000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $5095200 to yield 12%. Waterway uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2017? (Round your answer to the nearest dollar.)

please explain how to get answer

Solution

First, drawing up the amortisation table, Effective interest rate amortisation of Bond Discount Date Int.payment-Stated at 5%*Face value Int. Expense--Yield 6%*Previous Carrying value Discount amortised Debit balance in Bond Discount a/c Credit balance in Bonds Payable a/c Carrying value of Bonds A B C D=C-B E F G=F-E Credit Cash Debit Interest expense Credit Bond discount Jan 1,2017 404800 5500000 5095200 June 30,2017 275000 305712 30712 374088 5500000 5125912 31-Dec-17 275000 307555 32555 341533 5500000 5158467 June 30,2018 275000 309508 34508 307025 5500000 5192975 31-Dec-18 275000 311578 36578 270447 5500000 5229553 June 30,2019 275000 313773 38773 231674 5500000 5268326 31-Dec-19 275000 316100 41100 190574 5500000 5309426 June 30,2020 275000 318566 43566 147008 5500000 5352992 31-Dec-20 275000 321179 46179 100829 5500000 5399171 June 30,2021 275000 323950 48950 51879 5500000 5448121 31-Dec-21 275000 326887 51887 -9 5500000 5500009 So with reference from the above schedule, Interest expense to be reported for the year 2017 will be 305712+307555= 613267