Answer:
The 2018 Interest Expenseis $1,568,498
Explanation:
As the bond is issued at discount
Discount on the bond = Face value - Issuance value = $20,000,000 - $19,604,145 = $395,855
The discount will be amortized and added to the interest payment to calculate the interest expense
The Interest Expense is calculated as follow
Interest expense = Interest payment in the period + Discount amortization
June 30, 2018
Interest payment = Face value x Coupo rate x semiannual fraction = $20,000,000 x 7.8% x 6/12 = $780,000
Discount amortization = ( Bond carrying value x Effective rate x semiannual fraction ) - Interest payment = ( $19,604,145 x 8% x 6/12 ) - $780,000 = $784,165.80 - $780,000 = $4,165.80 = $4,166
Interest expense = $780,000 + $4,166 = $784,166
Bond's Caryying value = $19,604,145 + $4,166 = $19,608,311
December 31, 2018
Discount amortization = ( Bond carrying value x Effective rate x semiannual fraction ) - Interest payment = ( $19,608,311 x 8% x 6/12 ) - $780,000 = $784,332 - $780,000 = $4,332
Interest expense = $780,000 + $4,332 = $784,332
2018
Interest expense = Interest expense on June 30, 2018 + Interest expense on December 31, 2018 = $784,166 + $784,332 = $1,568,498
