Cleveland purchased $200,000 of Clair Company's 10-year, 9 percent bonds for $166,100 on July 1, 2012. Cleveland purchased the bonds to yield 12 percent interest. If Cleveland uses the effective-interest method to amortize discounts, how much interest revenue should Cleveland recognize for 2012 as a result of the investment?

Question

Quizplus · Accepted Answer

The interest revenue is calculated using the effective interest rate of 12% on the carrying amount of the bonds. For 2012, the interest revenue is $166,100 * 12% * (6/12) = $9,966, as the bonds were purchased mid-year.

Cleveland Purchased $200,000 of Clair Company's 10-Year, 9 Percent Bonds