Question

On January 1, 2021, an investor paid $296,000 for bonds with a face amount of $316,000. The contract rate of interest is 12% while the current market rate of interest is 15%. Using the effective interest method, how much interest income is recognized by the investor in 2022 (assume annual interest payments and amortization)

Answer 1

Answer:

$45,372

Explanation:

The computation of the interest income using the effective interest method is shown below

Interest Income is

= [Paid amount + (Paid amount × current market rate of interest) - (face value of the bond × contract rate of interest)] × current market rate of finterest

= [$296,000 + ($296,000 × 15%) - ($316,000 × 12%)] × 15%

= [$296,000 + $44,400 - $37,920)} × 15%

= $45,372

We simply applied the above formula