On July 1, Year 1, Fairfield Company purchased $5 million of Hampton Corporation's 6% bonds for $3,932,522. The bonds were purchased to yield 8% interest and were classified as held-to-maturity securities. The bonds mature in 25 years and pay interest annually on July 1. Assuming that Fairfield uses the effective interest method of amortization, what amount should it report for its investment in bonds on December 31, Year 1? (Round all calculations to the nearest cent, and your final answer to the nearest dollar.)

Question

Quizplus · Accepted Answer

The correct answer is B: $3,939,823.The effective interest method of amortization allocates the difference between the purchase price and the maturity value of the bonds over the life of the bonds. The amount of interest expense for the first six months is $3,932,522 * 8% * 6/12 = $164,250. The amount of amortization for the first six months is $3,932,522 * (8% - 6%) * 6/12 = $3,750. The carrying value of the investment on December 31, Year 1 is $3,932,522 + $164,250 - $3,750 = $3,939,823.

On July 1, Year 1, Fairfield Company Purchased $5 Million