On January 1, Year 1, Weller Company issued bonds with a $250,000 face value, a stated rate of interest of 9.50%, and a 10-year term to maturity. Weller uses the effective interest method to amortize bond discounts and premiums. The market rate of interest on the date of issuance was 7.50%. Interest is paid annually on December 31. Assuming Weller issued the bond for $268,590, what is the amount of interest expense that will be recognized during Year 3? (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

The interest expense using effective interest method is normally computed by multiplying the bond opening balance in a year by the bond market interest rate as done in the attached.

It is noteworthy that the opening book balance in a particular year is the previous year closing balance.

closing balance=opening balance+interest expense-coupon payment

coupon payment=face value*coupon rate

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anthougo anthougo · Answer 2 · 2021-11-24T23:34:29+01:00

The amount of interest expense that Weller will recognize during Year 3 is $19,583.

Data and Calculations:

Bonds FAce value = $250,000

Bonds Proceeds = $268,590

Bonds Premium = $18,590 ($268,590 - $250,000)

Stated interest rate = 9.5%

Market interest rate = 7.5%

Maturity period = 10 years

Interest payment = December 31 annually

December 31, Year 1:

Cash payment = $23,750 ($250,000 x 9.5%)

Effective interest = $20,144 ($268,590 x 7.5%)

Amortization of premium = $3,606 ($23,750 - $20,144)

Carrying value = $264,984 ($268,590 - $3,606)

December 31, Year 2:

Cash payment = $23,750 ($250,000 x 9.5%)

Effective interest = $19,874 ($264,984 x 7.5%)

Amortization of premium = $3,876 ($23,750 - $19,874)

Carrying value = $261,108 ($264,984 - $3,876)

December 31, Year 3:

Cash payment = $23,750 ($250,000 x 9.5%)

Effective interest = $19,583 ($261,108 x 7.5%)

Amortization of premium = $4,167 ($23,750 - $19,583)

Carrying value = $256,941 ($261,108 - $4,167)

Thus, in Year 3, the Weller Company will recognize an interest expense of $19,583.

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