On July 1, 2011, Houston Company purchased as a long-term investment Essex Company's ten-year, 9 percent bonds, with a face value of $100,000 for $95,200. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2015. Houston uses the straight-line method of amortization. What is the amount of interest revenue that Houston should report in its income statement for the year ended December 31, 2011?

Question

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The interest revenue includes the cash interest received plus the amortization of the discount. The cash interest for half a year is $4,500 (9% of $100,000 face value, divided by 2 for semiannual). The discount of $4,800 ($100,000 - $95,200) is amortized over 4 years (8 periods), resulting in $600 per period. For the year 2011, Houston will recognize two periods of interest revenue: $4,500 + $600 = $5,100.

On July 1, 2011, Houston Company Purchased as a Long-Term