Album Co. issued 10-year $200,000 debenture bonds on January 2. The bonds pay interest semiannually. Album uses the effective interest method to amortize bond premiums and discounts. The carrying value of the bonds on January 2 was $185,953. A journal entry was recorded for the first interest payment on June 30, debiting interest expense for $13,016 and crediting cash for $12,000. What is the annual stated interest rate for the debenture bonds?

 

a.14%

 

b.12%

 

c.7%

 

d.6%

 

Answer:B

 

Choice "B" is correct. GAAP interest expensebeginning of the period x effective periodic interest rate algebraically changes to: The question is asking for the "stated interest," not GAAP interest.

 

Stated interest$12,000/200,000.