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On January 1, Year 1, Gibson Corporation purchased bonds issued by Williamson Company. These bonds were...

On January 1, Year 1, Gibson Corporation purchased bonds issued by Williamson Company. These bonds were classified as held-to-maturity securities. The face value of these bonds is $200,000, pay 8% interest, and were purchased to yield 6%. The bonds mature in 10 years and pay interest on an annual basis. If Gibson Corporation paid $229,440 for these bonds, how much interest revenue should it report on the bonds at December 31, Year 1? Assume that Gibson used the effective interest method.

A) $22,944

B) $12,000

C) $16,000

D) $13,766

Solutions

Expert Solution

Correct answer—(D) $ 13766

Amortization table

Period

Cash received for interest @8% on 200000

Interest Income

Premium on Bonds payable

Carrying Value of Bond

$         (29,440)

$             229,440

Year 1

$             16,000

$            13,766

$           (2,234)

$             227,207

Year 2

$             16,000

$            13,632

$           (2,368)

$             224,839

Year 3

$             16,000

$            13,490

$           (2,510)

$             222,330

Year 4

$             16,000

$            13,340

$           (2,660)

$            219,669

ekkarill92 answered 3 years ago
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