On January 1, 2021, a company acquires $540,000 of another company’s 7% bonds at a price...

On January 1, 2021, a company acquires $540,000 of another company’s 7% bonds at a price of $410,000. For the investor company, interest is received on January 1 of each year, and the bonds mature on January 1, 2031. The investment will provide the investor a 10% yield (assumed for ease of computation; do not attempt computation beyond the years necessary). The bonds are classified as held-to-maturity. Using the effective interest method, what is the amount the investor company will record for Interest Revenue for the year ended 12/31/2022?

Expert Solution

Worknig Notes: 1
	Calculation of Discount amount amortized per year
		Par Value of the Bonds =	$ 540,000
		Issued price	$ 410,000
		Discount to be amortized	$ 130,000
		Rate of interest of Coupon	7%
		Yearly Coupon Amount	$ 37,800

		Market Rate of interest =	10%

SOLUTION :
	Schedule of Interest revenue and bond premium Amortization
	Effective interest Method
	Date	Cash Received	Interest Revenue @ 10.00% on Carrying Amount	Increase in Carrying Value	Caryying Amount
	Jan 01.2021				$ 410,000
	Jan 01.2022	$ 37,800	$ 41,000	$ 3,200	$ 413,200
	Jan 01.2023	$ 37,800	$ 41,320	$ 3,520	$ 416,720


	As per above schedule as on Jan 01. 2023 interet revenue is $ 41,32o it means revenue recognized
	as on Dec 31.2022 is $ 41,320


	Answer = $ 41,320

ekkarill92 answered 1 year ago

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