McLennan Corporation issued $250,000 of 6.5%, 10-year bonds. The bonds are dated

Question

McLennan Corporation issued $250,000 of 6.5%, 10-year bonds. The bonds are dated and sold on January 1, 2016. Interest payment dates are January 1 and July 1 The bonds are issued to yield the market interest rate of 7%. The price of the bonds (amount raised from issuance) is $241,117. McLennan Corporation uses the effective-interest method. Wnari a toi What is the amount of interest expense that McLennan Corporation will record on July 1, 2016, the first semiannual interest payment date? (All amounts rounded to the nearest dollar.) iaC. O A. $10,525 B. $314 OC. S8.125 O D. $8,439

Explanation / Answer

D. $ 8,439

Working:

As per effective interest method, Interest expense for the first interest payment date = Beginning Book Value x Semi annual yield to maturity = $       2,41,117 x 3.50% = $             8,439 Note:Net Proceed from bonds is the beginning book value for the first interest payment date.

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