Question

In: Accounting

1. On January 3, 2017, Pecan Company acquires $100,000 of Pie Company's 10-year, 10% bonds at...

1. On January 3, 2017, Pecan Company acquires $100,000 of Pie Company's 10-year, 10% bonds at a price of $103,220 to yield 9.5%. Interest is payable each June 30 and December 31. The bonds are classified as held to maturity.

a) Assuming that Pecan Company uses the effective interest method, what is the amount of interest revenue that would be recognized in 2018 related to these bonds?

b) Assuming that Pecan Company uses the straight line method, what is the amount of premium amortization that would be recognized in 2019 related to these bonds?

Expert Solution

Requirement 1a:-

Under the effective interest method, the amount of interest revenue that would be recognized in 2018 related to the bonds is :-

Date	*Cash Received (Face value of bonds 10% * 6/12)**	*Interest Revenue(Carrying amount 9.5% * 6/12)**	Premium Amortization	Bond Carrying Amount
January 3, 2017				103,220.00
June 30, 2017	5,000.00	4,902.95	97.05	103,122.95
December 31, 2017	5,000.00	4,898.34	101.66	103,021.29
June 30, 2018	5,000.00	4,893.51	106.49	102,914.80
December 31, 2018	5,000.00	4,888.45	111.55	102,803.25

Based on the above calculation, the Interest revenue for 2018 is :- $4,893.51 + $4,888.45 = $9,781.96

Interest revenue for 2018 - Effective Interest method = $9,782(Rounded)

Requirement 1b:-

Premium Amortization for 2019 under straight line method

Premium amortization = ($103,220 - $100,000)/20 periods

Since bond interest is paid semi annually, the number of interest payment is 20 periods (10 years * 2)

=$3,220/20

=$161 per period

During 2019, Premium amortization = $161 * 2

Premium Amortization = $322

Please let me know if you have any questions via comments and all the best :) !

ekkarill92 answered 2 years ago

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