On July 1, 2012, Horton Co.purchased Lopez, Inc., 10-year, 9%, bonds with a face value of $500,000, for $470,000 (a 10% effective interest rate).Interest is payable semiannually on January 1 and July 1.The bonds mature on July 1, 2022.Horton uses the effective interest method of amortization.Ignoring income taxes, the amount reported in Horton's 2012 income statement as a result of Horton's non-trading investment in Lopez was

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Quizplus · Accepted Answer

The correct answer is A because the amount reported in Horton's 2012 income statement as a result of Horton's non-trading investment in Lopez is $23,500. This is calculated as follows:Interest income = $500,000 x 9% x 6/12 = $22,500Amortization of discount = ($500,000 - $470,000) x 10% x 6/12 = $1,000Total income = $22,500 + $1,000 = $23,500