On January 1, Year 1, Gibson Corporation purchased bonds issued by Williamson Company. These bonds were classified as held-to-maturity securities. The face value of these bonds is $100,000, pay 8% interest and were purchased to yield 6%. The bonds mature in 10 years and pay interest on an annual basis. If Gibson Corporation paid $114,720 for these bonds, how much interest revenue should it report on the bonds at December 31, Year 1? Assume that Gibson used the effective interest method.

Question

Quizplus · Accepted Answer

Under the effective interest method, interest revenue is calculated based on the carrying amount of the bond and the yield rate. The carrying amount at the beginning of Year 1 is $114,720, and the yield rate is 6%. Therefore, the interest revenue for Year 1 is $114,720 * 6% = $6,883.

On January 1, Year 1, Gibson Corporation Purchased Bonds Issued