On November 1, 2014, Horton Company purchased Lopez, Inc., 10-year, 9%, bonds with a face value of $600,000, for $540,000. An additional $15,000 was paid for the accrued interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2021. Horton uses the straight-line method of amortization. Ignoring income taxes, the amount reported in Horton's 2014 income statement as a result of Horton's available-for-sale investment in Lopez was

Question

Quizplus · Accepted Answer

The amount reported in Horton's 2014 income statement as a result of Horton's available-for-sale investment in Lopez is $10,500. This is calculated by first determining the interest income and then adjusting for the amortization of the discount on the bonds. The interest income is calculated based on the face value of the bonds ($600,000) and the stated interest rate (9%), which gives an annual interest of $54,000. Since the interest is paid semiannually, Horton would receive $27,000 in interest income for the half-year period after the purchase on November 1, 2014. The discount on the bonds ($600,000 face value - $540,000 purchase price = $60,000) is amortized over the life of the bonds using the straight-line method. The amortization for each semiannual period is $60,000 / 20 periods = $3,000. Therefore, the total amount reported in the income statement for 2014 is the interest income plus the amortization of the discount, which is $27,000 + $3,000 = $30,000. However, since the question specifies the amount related to the available-for-sale investment, and considering the payment for accrued interest is not recognized in the income statement but rather adjusts the investment cost, the correct interpretation focuses on the recognition of interest income and amortization of the discount. Given this, the initial calculation provided does not directly lead to the correct answer without considering the specific period and the nature of the investment income recognition for available-for-sale securities. The correct approach involves recognizing the income earned from the investment in the period after the purchase until the end of the year, which would include the interest income and the amortization of the discount for that specific period.

On November 1, 2014, Horton Company Purchased Lopez, Inc