Question

On January 1, 2024, an investor paid $270,000 for bonds with a face amount of $325,000. 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

Answer 1

$27,100

Step-by-step explanation:

The computation of the interest income recognized is shown below;

Interest Recognised = Investment Made × Markt interest Rate

= $270,000 × 10 %

= $27,000

in 2025

Interest income Recognised is

= ( investment + ( interest Recorgnised in 2021 - interest income ))* Market interet Rate

= ($270,000 + ( 270,000 × 10%) - ( 325,000 × 8%)) × 10%

= ($270,000 + $27,000 - $26,000) × 10%

= $27,100