InterTech Corporation needed financing to build a new manufacturing plant. On June 30th, 2017, InterTech issued $4,350,000 of 8-year bonds with a 6% coupon rate (payments due on December 31^st and June 30^th) . The effective interest rate was 8%.
What amount in interest expense did InterTech record for the December 31, 2017 payment?

Question

Quizplus · Accepted Answer

To calculate the interest expense for the December 31, 2017 payment, we use the effective interest rate method. The bond's carrying value initially is $4,350,000. The effective interest rate is 8%, so for half a year (since interest payments are semi-annual), it's 4% (0.08/2). The interest expense is the carrying value multiplied by the effective semi-annual interest rate: $4,350,000 * 4% = $174,000. However, this calculation mistake led to the incorrect choice being selected. The correct process involves calculating the interest expense based on the effective interest rate applied to the bond's carrying value, but without the initial carrying value or the specific method to adjust for the effective rate versus the coupon rate provided, the correct answer cannot be determined from the information given. The mistake was in the calculation explanation; the correct approach involves applying the effective interest rate to the bond's carrying value or adjusting for the period's interest payment difference, which wasn't accurately described. Given the error in calculation explanation, the correct answer should reflect the interest expense calculated by the effective interest rate method, which cannot be accurately determined from the provided explanation. Therefore, the correct choice should be based on recalculating with the right method, but without the necessary details, the intended correct answer isn't clear from the provided options.

InterTech Corporation Needed Financing to Build a New Manufacturing Plant