On January 1, 2010, Martin Company purchased Jetson Company's 9% bonds with a face amount of $200, 000 for $213, 420 to yield 8%.The bonds mature on January 1, 2020, and Martin has both the intent and ability to hold these bonds to maturity.The bonds pay interest annually on December 31.Assuming Martin uses the effective interest method of amortizing the bond premium, interest revenue reported on the December 31, 2010, balance sheet would be

Question

Quizplus · Accepted Answer

The premium paid by Martin Company, which is $213,420 - ($200,000 x 0.09) = $213,420 - $18,000 = $195,420 should be amortized over the term of the bond using the effective interest method. The effective interest for the first year can be calculated as:

Effective interest = $195,420 x 0.08 = $15,634.40

Interest received from the bonds on December 31, 2010, can be calculated as:

Interest received = $200,000 x 0.09 = $18,000

Hence, the interest revenue to be reported on the December 31, 2010, balance sheet would be the sum of the effective interest and the interest received, which is:

Interest revenue = $15,634.40 + $18,000 = $17,634.40

Rounding this amount up to the nearest dollar gives the answer of $17,074.

On January 1, 2010, Martin Company Purchased Jetson Company's 9