Question

Carla Vista Company purchased $1850000 of 11% bonds of Scott Company on January 1, 2021, paying $1743903. The bonds mature January 1, 2031; interest is payable each July 1 and January 1. The discount of $106097 provides an effective yield of 12%. Carla Vista Company uses the effective-interest method and plans to hold these bonds to maturity.

For the year ended December 31, 2021, Carla Vista Company should report interest revenue from the Scott Company bonds of:
A. $214110.
B. $209268.
C. $209441.
D. $203500.

Answer 1

To calculate the interest revenue from the Scott Company bonds for the year ended December 31, 2021, you need to calculate the interest expense on the bonds and subtract it from the discount amortization. The correct answer is A. $214,110.

Step-by-step explanation:

To calculate the interest revenue from the Scott Company bonds for the year ended December 31, 2021, we need to calculate the interest expense on the bonds and subtract it from the discount amortization. Here are the steps to calculate the interest revenue:

1. Calculate the carrying value of the bonds at the beginning of the year by subtracting the discount amortization from the original purchase price of the bonds. Carrying value = Purchase price - Discount amortization = $1,743,903 - $106,097 = $1,637,806.
2. Calculate the interest expense for the year by multiplying the carrying value at the beginning of the year by the effective yield. Interest expense = Carrying value * Effective yield = $1,637,806 * 12% = $196,536.72.
3. Calculate the discount amortization for the year by subtracting the interest expense from the interest payment. Discount amortization = Interest payment - Interest expense = $185,000 * 11% - $196,536.72 = $19,463.28.
4. Calculate the interest revenue by subtracting the discount amortization from the interest expense. Interest revenue = Interest expense - Discount amortization = $196,536.72 - $19,463.28 = $177,073.44.

Therefore, the correct answer is A. $214,110.