Question

Jan purchases taxable bonds with a face value of $250,000 for $265,000. The annual interest paid on the bonds is $10,000. Assume Jan elects to amortize the bond premium. The total premium amortization for the first year is $1,600.What is Jan's interest income for the first year?

A. $10,000

B. $11,600

C. $8,400

D. $12,600

Answer 1

Jan's interest income for the first year is $8,400, which is the annual interest paid minus the premium amortization of the bonds.

Step-by-step explanation:

Jan's interest income for the first year, after electing to amortize the bond premium, is calculated by subtracting the premium amortization from the annual interest paid on the bonds. In this case, Jan paid $265,000 for bonds with a face value of $250,000, resulting in a premium of $15,000. The annual interest paid on the bonds is $10,000, and the total premium amortization for the first year is reported as $1,600.

To compute the interest income that Jan will report, you subtract the premium amortization from the annual interest paid: $10,000 (annual interest) - $1,600 (amortization) = $8,400. Therefore, the correct answer is C. $8,400, which is the taxable interest income Jan will recognize for the first year after the amortization of the bond premium.