Question

Mumm Co. issued 10-year $200,000 debenture bonds on January 1, 2015. The bonds pay interest semiannually. Mumm uses the effective interest method to amortize bond premiums and discounts. The carrying value of the bonds on January 1, 2015 was $185,953. A journal entry was recorded for the first interest payment on June 30, 2015, debiting interest expense for $13,016 and crediting cash for $12,000. What is the annual stated interest rate for the debenture bonds?

Answer 1

The annual stated interest rate for the debenture bonds is 12%.

Step-by-step explanation:

Face value of bonds = $200,000

Carrying value of bonds = $185,953

Interest expense debited on June 30 = $13,016

Cash payment for interest on June 30 = $12,000

Semi annual interest payment on bonds = Face value of bonds x Stated rate of interest x 6/12

12,000 = 200,000 x Stated rate of interest x 6/12

Stated rate of interest = 12,000 x 12/6 x 1/200,000

= 12%

Therefore, The annual stated interest rate for the debenture bonds is 12%.