Question

On January 1, 2021, SteveCo purchased $100,000 of Clear Company bonds at a premium of $8,000. The Clear bonds pay 8% interest but were purchased when the market interest rate was 7% for bonds of similar risk and maturity. The bonds pay interest semiannually on June 30 and December 31 of each year. SteveCo accounts for the bonds as a held-to-maturity investment, and uses the effective interest method. In SteveCo's December 31, 2021, journal entry to record the second period of interest, SteveCoRupar would record a credit to interest revenue of:

Answer 1

$3,772.30

Step-by-step explanation:

For computing the second period of interest we need to do following calculations

Cash interest received

= $100,000 × 8% ÷ 2

= $4,000

Interest received

= $108,000 × 7% ÷ 2

= $3,780

So, the premium amortized is

= $4,000 - $3,780

= $220

Now the carrying value after considering the first payment is

= $108,000 - $220

= $107,780

Now the interest revenue is

= $107,780 × 6% ÷ 2

= $3,772.30