Financial Assets at amort. cost

Question 1

On January 1 of the current year, Carr Company purchased Fay Corp., 9% bonds with a face amount of $400,000 for $375,600 to yield 10%. The bonds are dated this January 1, mature on December 31 in ten years, and pay interest annually on December 31. Carr uses the effective interest method of amortizing bond discount. In its income statement for the current year ended December 31, what total amount should Carr report as interest revenue from the long-term bond investment?

Answer 1

$37,560

The amount of interest revenue recognized is determined as follows:

Bond investment carrying amount, January 1 $375,600
Effective interest rate × 10%
Interest revenue recognized $ 37,560 in the current year