Question

On July 1, 2017, Wheeler Company purchased $4,000,000 of Duggen Company's 8% bonds, due on July 1, 2024. The bonds, which pay interest semiannually on January 1 and July 1, were purchased for $3,500,000 to yield 10%. Determine the amount of interest revenue Wheeler should report on its income statement for the year ended December 31, 2017.

Answer 1

The amount of interest revenue Wheeler should report on its income statement for the year ended December 31, 2017, is $70,000.

Step-by-step explanation:

To calculate the amount of interest revenue Wheeler should report on its income statement for the year ended December 31, 2017, we need to calculate the interest earned on the bond for the period from July 1, 2017, to December 31, 2017.

The bond pays interest semiannually, so the interest rate for each period is 8%/2 = 4%. The bond was purchased for $3,500,000, so the annual interest earned is 4% of $3,500,000 = $140,000. However, the period from July 1, 2017, to December 31, 2017, is only half a year, so the interest revenue for that period is $140,000/2 = $70,000.

Therefore, Wheeler should report $70,000 of interest revenue on its income statement for the year ended December 31, 2017.