On January 1, 2016, an investor paid $291,000 for bonds with a face amount of $3
ID: 2423211 • Letter: O
Question
On January 1, 2016, an investor paid $291,000 for bonds with a face amount of $300,000. The contract rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2017 (assume annual interest payments and amortization)?
On June 30, 2016, Hardy Corporation issued $10 million of its 8% bonds for $9.2 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2016, and mature on June 30, 2026. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the six months ended December 31, 2016?
Please show steps and calculations. Thanks.
Explanation / Answer
Answer 1
291000 * 10% => $ 29100 is the interest income recognized by the investor in 2017
Answer 2
9200000 *10% => 920000
10000000*8% => 800000
9200000 - 800000 => 120000
As semiannual and on december 2016 => 120000 / 2 => $60000
The bond discount be reduced for the six months ended December 31, 2016 => $ 60000