Question

atton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2021, paying $1,410,375. The bonds mature January 1, 2031; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. On July 1, 2021, Patton Company should debit its Debt Investments account for the Scott Company bonds by__________ and credit its Interest Revenue account by __________.

Answer 1

Patton Company should debit its Debt Investments account for the Scott Company bonds by $2,571 and credit its Interest Revenue account by $155,283

Step-by-step explanation:

On July 1 2021, Patton Company should increase its Debt Investments account for the Scott Company bonds by =

Amount of discount amortized = Interest revenue - Interest received

= ($1,410,375 × 11% × 6/12) - ($1,500,000 × 10% × 6/12)

= $77,571 - $75,000

= $2,571

Interest revenue on 31 December 2021 = ($1,410,375 + $2,571) × 11% × 6/12

= $77,712

For the year ended December 31, 2021, Patton Company should report interest revenue from the Scott Company bonds of = $77,571 + $77,712 = $155,283