Asked by Elijah Dotson on Jul 28, 2024
Verified
On January 1, 2010, Martin Company purchased Jetson Company's 9% bonds with a face amount of $200, 000 for $213, 420 to yield 8%.The bonds mature on January 1, 2020, and Martin has both the intent and ability to hold these bonds to maturity.The bonds pay interest annually on December 31.Assuming Martin uses the effective interest method of amortizing the bond premium, interest revenue reported on the December 31, 2010, balance sheet would be
A) $16, 000
B) $17, 074
C) $18, 000
D) $18, 926
Bond Premium
The amount by which the market price of a bond exceeds its principal amount or par value, often occurring when the bond's interest rate is higher than current market rates.
Effective Interest
The actual interest rate incurred on a loan or bond, reflecting the amortization of any fees or additional costs over the life of the loan.
Interest Revenue
Income earned from investments, loans, and other sources requiring the borrower to pay interest.
- Calculate and disclose earnings, advancements, or shortfalls associated with investment securities.
- Identify and apply the accounting treatments for premiums, discounts, and amortization related to bond investments.
Verified Answer
Effective interest = $195,420 x 0.08 = $15,634.40
Interest received from the bonds on December 31, 2010, can be calculated as:
Interest received = $200,000 x 0.09 = $18,000
Hence, the interest revenue to be reported on the December 31, 2010, balance sheet would be the sum of the effective interest and the interest received, which is:
Interest revenue = $15,634.40 + $18,000 = $17,634.40
Rounding this amount up to the nearest dollar gives the answer of $17,074.
Learning Objectives
- Calculate and disclose earnings, advancements, or shortfalls associated with investment securities.
- Identify and apply the accounting treatments for premiums, discounts, and amortization related to bond investments.
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