Question

Wildhorse Company purchased $1350000 of 11% bonds of Scott Company on January 1, 2021, paying $1272578. The bonds mature January 1, 2031; interest is payable each July 1 and January 1. The discount of $77422 provides an effective yield of 12%. Wildhorse Company uses the effective-interest method and plans to hold these bonds to maturity. For the year ended December 31, 2021, Wildhorse Company should report interest revenue from the Scott Company bonds of:

Answer 1

Answer:

Wildhorse Company

For the year ended December 31, 2021, Wildhorse Company should report interest revenue from the Scott Company bonds of:

= $152,709.

Explanation:

a) Data and Calculations:

Face value of bonds purchased on January 1, 2021 = $1,350,000

Interest rate on the bonds = 11%

Effective interest rate = 12%

Cash paid for the bonds = $1,272,578

Discount on bonds = $77,422

Interest revenue for 2021 = $1,272,578 * 12%

= $152,709 based on the effective interest method.