On june 30, 2018, l. n. bean issued $10 million of its 8% bonds for $9 million. the bonds were priced to yield 10%. interest is payable semiannually on december 31 and july 1. if the effective interest method is used, how much bond interest expense should the company report for the 6 months ended december 31, 2018? a. $400,000b. $420,000c. $450,000d. $500,000

The answer is: $450,000

Explanation:

The effective interest method is used for bonds sold at a discount. The amount of the bond discount is amortized to interest expense over the bond's life.

Total annual interest: $800,000 ($10 million x 8%)

Bond discount: $1 million amortized in 10 years, $100,000 per year (the discount is the difference between bond's par value and selling value $10M - $9M = $1M)

Total annual interest = $8,000,000 + $100,000 = $900,000

interest expense for 6 months = $900,000 / 2 = $450,000

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