Question

On January 1, 2020, National Retail purchased $100,000 of GEH Company bonds at a discount of $10,000. The GEH bonds pay 6% interest but were purchased when the market interest rate was 8% for bonds of similar risk and maturity. The bonds pay interest semiannually on June 30 and December 31 of each year. National Retail accounts for the bonds as a held-to-maturity investment and uses the effective interest method. In National Retail’s annual income statement, interest revenue will show:

	a.	$3,624
	b.	$624
	c.	$6,000
	d.	None of the answer choices are correct.
	e.	$0

Answer 1

Worknig Notes: 1
	Calculation of Discount amount and half yearly coupon rate
		Par Value of the Bonds =	$                         100,000
		Issued price	$                           90,000
		Discount to be amortized	$                           10,000
		Rate of interest of Coupon	6%
		Yearly Coupon Amount	$                             6,000
		Half yearly coupon amount =	$                             3,000
		Market Rate of interest =	8%
		Half yearly interest rate = 8% /2 =	4.00%
SOLUTION :
	Schedule of Interest revenue and bond premium Amortization
	Effective interest Method
	Date	Cash Received	Interest Revenue @ 4.00% on Carrying Amount	Increase in Carrying Value	Carrying Amount of Bonds
	Issue Date				$             90,000
	First Semi- Annual	$                                                                      3,000	$                             3,600	$                      600	$             90,600
	2nd Semi-Annual	$                                                                      3,000	$                             3,624	$                      624	$             91,224
		Total interest Revenue of year 1 =	$                             7,224
Answer = Option D = None of the answer choices are correct