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16 July, 22:14

Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2018, paying $1,410,375. The bonds mature January 1, 2028; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. For the year ended December 31, 2018, Patton Company should report interest revenue from the Scott Company bonds of:

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  1. 16 July, 22:27
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    Value of the bonds at December 31th: 1,415,658

    Interest revenue: 77570.63 + 77712.01 = 152,282.64

    Explanation:

    effective rate method:

    interest revenue: carrying value x market rate

    1,410,375 x 5.5% = 77,570.63

    and 1,412,946 x 5.5 = 77,712.01

    cash proceeds: face value x bond rate

    1,500,000 x 10%/2 = 75,000

    amortization on bonds: the difference between each other.

    77570.63 - 75,000 = 2,570.63

    77,712.01 - 75,000 = 2,712.01

    Period Carrying procceds Interest Amortization Ending Value

    June 1,410,375 75000 77570.63 2570.63 1,412,946

    Dec 1,412,946 75000 77712.01 2712.01 1,415,658
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