On July 1, 2010, Navarre Corporation issued bonds with a face value of $100, 000 and 12% interest payable semiannually.The bonds mature on June 30, 2015.The market rate of interest at the time of issuance was 14%, so the bonds were issued at a discount of $7, 054.Using the effective interest method, the amount of discount that should be amortized by Navarre on December 31, 2010, is

A) $702.35
B) $506.26
C) $493.75
D) $423.21

Question

Christian Martin · Accepted Answer

Final Answer : B, Explanation :  The effective interest method calculates interest based on the carrying amount of the bond. The initial carrying amount is $92,946 ($100,000 - $7,054). The interest expense for the first period is $6,506.26 (14% annual market rate / 2 * $92,946), and the cash interest paid is $6,000 (12% annual coupon rate / 2 * $100,000). The discount amortized is the difference: $6,506.26 - $6,000 = $506.26.

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