Question

On July 1, 2017, Sunland Company purchased $3,980,000 of Duggen Company’s 8% bonds, due on July 1, 2024. The bonds, which pay interest semiannually on January 1 and July 1, were purchased for $3,450,000 to yield 10%. Determine the amount of interest revenue Sunland should report on its income statement for the year ended December 31, 2017.

Interest revenue

$ ????????????

( i got 345000 and 690000 both were incorrect)

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Answer 1

Details given,

FV of bond=$3,980,000

Cupon rate=8%/year

Since interest is payable semiannualy the interest rate per term will be 4% (8*(6/12))

Here bond is issued at discout and sunland company purchased the bond for $3,450,000

IRR=10%/year & 5% per half year

Hence interest received for the half year till 31-12-2017 will be,

=FV of the bond*coupon interest rate of the term

Hence half year interest wii be

$3,980,000*4%=159200

PV of interest to be received on 31-12-2017,

=Interest*Pvf @IRR rate

Pvf of IRR@5%=1/1.05=0.9524

PV of interest to be received on 31-12-2017,

=159200*0.9524=151622.08