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Math Help - Bond Question

  1. #1
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    Bond Question

    Q: On January 1, 2007, Nott Co. sold to Day Corp. $400,000 of its 10% bonds for $354,118 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Nott report as interest expense for the six months ended June 30, 2007?

    a) $17,706
    b) $20,000
    c) $21,247
    d) $24,000

    ANS:
    Since the carrying value of the bond is $354,118 at 12%, the interest expense would be 354,118x.12 or $42,494.

    But this would be for the entire year... so for each month it would be 42,292/12 = 3541.18 per month.

    The question states that the interest payable is semiannually on Jan. 1 and July 1 and asks for the interest expense for June.
    So am I assuming that no interest is expensed for the first month and so i am only really counting on 5 months?

    5x3541 = 17,706 which would be answer a) but
    6x3541 = 21,247 which would be answer c)

    what do you guys think?
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  2. #2
    MHF Contributor kalagota's Avatar
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    Oct 2007
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    Taguig City, Philippines
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    1,026
    if i recall it right, this may help you..

    since it was sold ON JAN 1, the interest (per month basis) would occur at the of the month.. Counting it until the end day of JUNE (or the day before JUL 1), interests occur 6 times..
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  3. #3
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    you are absolutely correct. I knew that was correct the first time; I guess I was over analyzing the situation.
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