Question

On July 1, 2010, Kroger purchased 11-year, 8% bonds having maturity a value of $429,000. Interest is paid semi-annually on June 30 and December 31 and the bonds provide the bondholders a 6% yield. Kroger uses the effective-interest method to amortize discount or premium. At the time of acquisition, the bonds were classified as held-to-maturity. The fair value of the bonds on December 31, 2012 is $439,000. The fair value of the bonds as of December 31 of the immediately preceding year (prior measurement date) was $457,000.

What is the amount of net income recognized in the 2012 income statement solely as a result of these bonds? (Note: if the net amount results in a loss, enter a minus sign '-' prior to the amount. If the net amount results in income, enter the amount as a positive amount.)

Answer 1

Solution:

Computation of bond price
Table values are based on:
n=	22
i=	3%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.52189	$429,000	$223,892
Interest (Annuity)	15.93692	$17,160	$273,477
Purchase price of bonds			$497,369

Bond Amortization Schedule
Date	Interest received	Interest Revenue (3%)	Premium Amortized	Unamortized Premium	Carrying Value
1-Jul-10				$68,369	$497,369
31-Dec-10	$17,160	$14,921	$2,239	$66,130	$495,130
30-Jun-11	$17,160	$14,854	$2,306	$63,824	$492,824
31-Dec-11	$17,160	$14,785	$2,375	$61,449	$490,449
30-Jun-12	$17,160	$14,713	$2,447	$59,002	$488,002
31-Dec-12	$17,160	$14,640	$2,520	$56,482	$485,482

amount of net income recognized in the 2012 income statement solely as a result of these bonds = Interest revenue for 2012 = $14,713 + $14,640 = $29,353