Question

Patton Company purchased $400,000 of 10% bonds of Scott Co. on January 1, 2011, paying $376,100. The bonds mature January 1, 2021; interest is payable each July 1 and January 1. The discount of $23,900 provides an effective yield of 11%. Patton Company uses the effectiveinterest method and plans to hold these bonds to maturity. 5. On July 1, 2011, Patton Company should increase its Held-to-Maturity Debt Securities account for the Scott Co. bonds by

Answer 1

On July 1, 2011, Patton Company should increase its Held-to-Maturity Debt Securities account for the Scott Co. bonds by $20,000.

Step-by-step explanation:

In this scenario, Patton Company purchased $400,000 of 10% bonds of Scott Co. at a discount of $23,900, resulting in a payment of $376,100. The bonds have a maturity date of January 1, 2021, with interest payable on July 1 and January 1.

Since the effective yield is 11%, Patton Company should increase its Held-to-Maturity Debt Securities account for the Scott Co. bonds on July 1, 2011, by the amount of interest earned from January 1 to July 1.

To calculate this, we need to determine the interest earned for the period. The bond has a face value of $400,000 and an interest rate of 10%, which means it earns $40,000 in interest annually. For the 6-month period from January 1 to July 1, the interest earned would be $40,000/2 = $20,000.

Therefore, on July 1, 2011, Patton Company should increase its Held-to-Maturity Debt Securities account by $20,000 for the Scott Co. bonds.

Answer 2

$685.55

Step-by-step explanation:

Patton company ;

Bond payments $376,100 × 0.055

= $20,685.55

Less face amount $400,000 × 0.05

= $20,000

Held-to-maturity debt securities $685.55

($20,685.55 - $20,000)

Note:

Effective yield(market rate)

= 11% ÷ 2

= 5.5%

Bonds

= 10% ÷ 2

= 5%