Question

Alpha Company purchases a bond investment on January 1, 2017. The bonds have a par of $10,000, pay interest at a 5% annual rate, and have 5 years until maturity. What is the total Interest Income that will be reported over the life of the bond investment if the bonds were purchased at 95, and Alpha uses the straight line amortization method?

Answer 1

Answer:

Par Value of Bonds = $10,000

Purchase Price of Bonds = $10,000 * 95%
Purchase Price of Bonds = $9,500

Interest to be received annually = $10,000 * 5%
Interest to be received annually = $500

Total Amount to be received during the life of Bonds = Total Interest Received + Maturity Value
Total Amount to be received during the life of Bonds = 5 * $500 + $10,000
Total Amount to be received during the life of Bonds = $12,500

Total Interest Income = Total Amount to be received during the life of Bonds - Purchase Price of Bonds
Total Interest Income = $12,500 - $9,500
Total Interest Income = $3,000