Question

b inc. purchased a $20,000 bond on its issue date, october 1, 2023. the bond pays interest at maturity, september 30, 2026, at a rate of 4% compounded annually. b inc. has a december 31 year end. what amount of interest must be included in income for 2023?

Answer 1

The amount of interest that must be included in income for 2023 by B Inc. is $800 (=$20,000 × 4%).

Step-by-step explanation:

B Inc. purchased a $20,000 bond on October 1, 2023, which pays interest at maturity on September 30, 2026, at a rate of 4% compounded annually. To determine the interest income for 2023, we need to consider the portion of interest accrued from the purchase date to the end of the year. Since the bond pays interest annually, the interest for the partial year in 2023 can be calculated as follows:

`\[ \text{Interest for 2023} = \frac{\text{Annual Interest Rate} * \text{Face Value}}{\text{Number of Compounding Periods per Year}} \]`

Substituting the given values, we get:

`\[ \text{Interest for 2023} = (0.04 * $20,000)/(1) = $800 \]`

Therefore, B Inc. must include $800 in interest income for the year 2023.

Understanding the calculation of interest for a partial year is crucial in accurately reporting income. It ensures compliance with accounting principles and provides an insight into the financial performance of the entity during the specified period.

The complete question is:

"B Inc. purchased a $20,000 bond on its issue date, October 1, 2023. The bond pays interest at maturity on September 30, 2026, at a rate of 4% compounded annually. B Inc. has a December 31 year end. What amount of interest must be included in income for the partial year 2023, from October 1 to December 31?"