On July 1, 2010, Triangle, Inc.purchased Circle Company's five-year 12% bonds with a face value of $500, 000 for $569, 000, which included $25, 000 of accrued interest.The bonds, which mature on February 1, 2015, are to be held to maturity and pay interest on February 1 and August 1.Triangle uses the straight-line method of amortization.The amount of income that Triangle would report for the calendar year 2010 as a result of this long-term investment would be

Question

Quizplus · Accepted Answer

The bonds were purchased for $569,000 which is $69,000 more than the face value of $500,000. This extra $69,000 is the premium paid by Triangle to Circle. The premium will be amortized (spread out) over the life of the bonds by the straight-line method.

Premium = $69,000
Number of years until maturity = 5
Annual amortization = Premium / Number of years until maturity
Annual amortization = $69,000 / 5 = $13,800

Triangle purchased the bonds on July 1, 2010, so they will receive interest payments on August 1, 2010, and February 1, 2011. The interest received on August 1, 2010, will include $25,000 of accrued interest that was included in the purchase price.

Interest received on August 1, 2010
= Face value x Interest rate x Time
= $500,000 x 12% x (2/12) (for 2 months)
= $10,000

Total income received in 2010
= Interest received on August 1, 2010 + Accrued interest included in purchase price
= $10,000 + $25,000 = $35,000

Annual amortization of premium = $13,800
Total amortization for 2010 (from July 1 to December 31) = (Premium / Number of years) x (Number of months / Total months in a year)
Total amortization for 2010 = ($69,000 / 5) x (6 / 12) = $20,700

Income reported for 2010 = Total income received in 2010 - Total amortization for 2010
Income reported for 2010 = $35,000 - $20,700 = $14,300

Therefore, Triangle would report an income of $14,300 for the calendar year 2010. However, since the question is asking for the amount of income resulting from the long-term investment, we need to divide the total amortization by 2 (for the two interest payments received in 2010) and add that to the income reported.

Adjusted income reported for 2010 = Income reported for 2010 + (Total amortization for 2010 / 2)
Adjusted income reported for 2010 = $14,300 + ($20,700 / 2) = $25,200

Thus, the correct answer is B) $25,200.