Question

On January 1, 2018, an investor paid $294,000 for bonds with a face amount of $314,000. The contract rate of interest is 8% while the current market rate of interest is 11%. Using the effective interest method, how much interest income is recognized by the investor in 2019 (assume annual interest payments and amortization)? (Round your answer to the nearest dollar amount.)

Answer 1

Bond: Bond is a type of debt instrument. Companies issue bonds to the general public to raise the fund. Bonds are payable on a periodic or lump-sum payment method. It is like note payable but the face value of a bond is less than the note payable. Bonds are generally issued in a batch of 100 or 500. The bondholder receives fixed interest on their bonds. Face value: The par value of the stock is the face value of the stock. It is generally very low. It usually remains the same. Issue price: The issue price is the price at which the company issuing the bond. Discount on bonds: Discount on bonds is when the carrying value is less than the face value of the bond payable. The discount on bonds is a debit balance contra liability account. Calculate the interest at the end of 2019 as follows: 1A B C D F E Discount amortisation Date Payment Interest 1-Jan-18 31-Dec-18 34,540 32,340 31-Dec-19 34,540 32,582 Carrying value 294,000 296,200 298,158 4 5 2.200 1,958 Spreadsheet of the above calculation: 1/A | B | C | D | E | F Discount Carrying amortisation value 294.000 =C4-D4 =F3+E4 =C5-D5 =F4+E5 Date Payment | Interest 1-Jan-18 31-Dec-18) 34,540 =F3*0.11 31-Dec-19 34,540 =F4*0.11 3 5