On July 1, 2016, Overlin Corp.purchased $100,000 of 8% bonds at face value.Interest is paid annually on June 30.If the accounting year for Overlin ends at December 31, 2016, what will be reported with respect to the bonds on that date?
A) The carrying value of the bonds will be $108,000.
B) The cash received in interest will be $8,000.
C) Interest income in the amount of $4,000 will be accrued.
D) A loss on the bonds will be reported in the Other Income and Expense section of the 2016 income statement until the entire amount of interest is paid on June 30, 2017.

Question

Quizplus · Accepted Answer

Since the accounting year for Overlin ends on December 31, 2016, only six months' worth of interest has been accrued on the bonds. This means that Overlin is entitled to receive $4,000 in interest income for the period from July 1, 2016, to December 31, 2016. Choice A is incorrect because the carrying value of the bonds remains at $100,000 until the next interest payment. Choice B is incorrect because Overlin will not have received any cash interest payments by December 31, 2016. Choice D is incorrect because there is no loss on the bonds to be reported until Overlin decides to sell them.