Question

On January 1, 2024, an investor paid $261,000 for bonds with a face amount of $315,000. The contract rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2025 (assume annual interest payments and amortization)

Answer 1

$26,100

Step-by-step explanation:

Calculation to determine how much interest income is recognized by the investor in 2025

Using this formula

Interest income = Amount paid* market rate of interest

Let plug in the formula

Interest income= $261,000*10%

Interest income= $26,100

Therefore the interest income that is recognized by the investor in 2025 will be $26,100