Question

Sunland Company purchased $1200000 of 11% bonds of Scott Company on January 1, 2021, paying $1122375. The bonds mature January 1, 2031; interest is payable each July 1 and January 1. The discount of $77625 provides an effective yield of 12%. Sunland Company uses the effective-interest method and plans to hold these bonds to maturity. On July 1, 2021, Sunland Company should increase its Debt Investments account for the Scott Company bonds by:________

Answer 1

Answer:

Sunderland Company should increase debt investment by $2,685.00  

Explanation:

Sunderland Company needs to increase its debt investments account for Scott Company bonds with the difference between effective interest earned on July 1 2021 minus the actual coupon interest received as shown below:

The actual interest revenue earned = $1122375*12%

                                                           =$ 134,685.00  

The coupon interest received=$1,200,000*11%

                                                 =$ 132,000.00  

In a nutshell,the investment in bonds earned interest of $134,685 but only $132,000 was received in cash,hence the difference of $2,685 is added to the bonds investment figure($134,685-$132,000)