Question

Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2018, paying $1,410,375. The bonds mature January 1, 2028; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. For the year ended December 31, 2018, Patton Company should report interest revenue from the Scott Company bonds of:

Answer 1

Answer:

Value of the bonds at December 31th: 1,415,658

Interest revenue: 77570.63 + 77712.01 = 152,282.64

Explanation:

effective rate method:

interest revenue: carrying value x market rate

1,410,375 x 5.5% = 77,570.63

and 1,412,946 x 5.5 =  77,712.01

cash proceeds: face value x bond rate

1,500,000 x 10%/2 = 75,000

amortization on bonds: the difference between each other.

77570.63- 75,000 = 2,570.63

77,712.01 - 75,000 = 2,712.01

Period Carrying procceds Interest Amortization Ending Value

June      1,410,375  75000   77570.63     2570.63 1,412,946

Dec       1,412,946  75000    77712.01     2712.01 1,415,658