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Face Value Bonds:Interest Expense and Cash

Brian Krogol
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Alright when we deal with face value bonds, interest expense is really easy. It's just gonna be equal to the cash amount of interest that we pay. Okay, so let's go ahead and figure that out. So it told us that $50,000 of bonds are paying 9% interest while we take the $50,000 And this is the the principal amount of the bonds times the 9% .09. Let's find out how much that is. 50,000 times 0.9 that equals 4500. Okay, so 4500 is the yearly amount of interest that we're gonna pay right yearly interest because it's a 9% bond. But notice when we pay the interest in these cases and this in this example we're paying interest semiannually, which is twice per year. So we're gonna make journal entries every six months, every six months we're gonna owe interest and we're gonna take on our interest expense for those six months. And then the next six months will take more the rest of the interest expense for the year. So july 1st. Remember only six months have passed. We issued them on january 1st and now it's july 1st. So six months of interest, Oops, months of interest. Well that's gonna equal our yearly amount of interest, the 4500 divided by two, Which comes out to 2250. Right? So from January through July January through June those six months we we have to pay six months of interest which is half of the 9% right