Question

Ivanhoe Company purchased $1600000 of 10% bonds of Scott Company on January 1, 2021, paying $1506375. The bonds mature January 1, 2031; interest is payable each July 1 and January 1. The discount of $93625 provides an effective yield of 11%. Ivanhoe Company uses the effective-interest method and plans to hold these bonds to maturity. On July 1, 2021, Ivanhoe Company should increase its Debt Investments account for the Scott Company bonds by

Answer 1

The increase in debt investments is $2,850.63

Step-by-step explanation:

The company would increase its debt investment by the difference between the interest revenue and the coupon payment made by Scott Company.

The interest revenue is calculated by multiplying the semi-annual effective yield by the carrying value of the investments which is $1,506,375.

The face value of the bond of $1600,000 is multiplied by the semi-annual coupon rate

Increase in investment=($1506375*11%/2)-($1,600,000*10%/2)=$2,850.63