Question

On January 1, 2021, Rupar Retailers purchased $100,000 of Anand Company bonds at a discount of $4,000. The Anand bonds pay 6% 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. Rupar accounts for the bonds as a held-to-maturity investment, and uses the effective interest method. In Rupar's December 31, 2021, journal entry to record the second period of interest, Rupar would record a credit to interest revenue of:

A. $3,000

B. $3,373

C. $3,360

D. $3,500

Answer 1

Answer : B) $ 3,373

Held- to -Maturity investment

Face Value of the bond = 100,000

Coupon rate = 6%, for Semi-annual Period = 6%/2 = 3%

Effective rate = 7% For Semi-annual Period = 7%/2 = 3.5%

Purchase Price of the Bond = 100,000- 4000 = 96,000

First interest :

Cash interest = 100,000*3% = 3,000

interest Revenue = 96,000*3.5% = 3,360

Discount Amortized = 3360-3,000 = 360

Carrying Value of the Bond = 96,000+360 = 96,360

Second YEar

Interest Revenue = Carrying Value *Effective interest Rate

= 96,360 *3.5% = 3,372.6 = $3,373 (Answer)