On January 1, 2016, an investor paid $291,000 for bonds with a face amount of $300,000....

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On January 1, 2016, an investor paid $291,000 for bonds with aface amount of $300,000. The state rate of interest is 8% while thecurrent market rate of interest is 10%. Using th eeffectiveinterest method, how much interest income is recognized by theinvestor in 2016 (assume annual interest payments andamortization)? HINT: Interest income to the investor is the same asinterest expense to the debtor. A. $23,280 B. $29,100 C. $24,000 D.$30,000 Is this a premium or a discount? What is the carrying valueat the end of year 1 (line 1 on the schedule)? What is the carryingvalue just before the bonds are paid off? Would you use straightline amortization? Why or why not? What is the cash interest paideach period? What is the interest expense in year 1 (line 1 on theschedule)? What is the interest expense journal entry for year1?

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4.1 Ratings (781 Votes)

1)	Interest income to the investor = 291000*10% =	$ 29,100
	Answer: Option [B]
2)	It is a discount.
3)	Carrying value at the end of year 1:
	Face value of the bonds	$ 3,00,000
	Less: Unamortized discount = 9000-(29100-24000) =	$ 3,900
	Carrying value at the end of year 1	$ 2,96,100
4)	Carrying value just before the bonds are paid off	$ 3,00,000
5)	No. Straight line does not reflect the interest expense correctly.
6)	Cash interest paid each year = 300000*8% =	$ 24,000
7)	Interest expense for Year 1 (for the issuer)	$ 29,100
8)	Journal entry (for the issuer):
	Interest expense	$ 29,100
	Discount on bonds payable		5100
	Cash		24000

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Transcribed Image Text

On January 1, 2016, an investor paid $291,000 for bonds with aface amount of $300,000. The state rate of interest is 8% while thecurrent market rate of interest is 10%. Using th eeffectiveinterest method, how much interest income is recognized by theinvestor in 2016 (assume annual interest payments andamortization)? HINT: Interest income to the investor is the same asinterest expense to the debtor. A. $23,280 B. $29,100 C. $24,000 D.$30,000 Is this a premium or a discount? What is the carrying valueat the end of year 1 (line 1 on the schedule)? What is the carryingvalue just before the bonds are paid off? Would you use straightline amortization? Why or why not? What is the cash interest paideach period? What is the interest expense in year 1 (line 1 on theschedule)? What is the interest expense journal entry for year1?