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On November 1, 2010, Alejandro Corporation purchased $300,000 of Beluga Corporation's 5%, 10-year bonds payable. Interest is payable on April 30 and October 31. Alejandro's year-end is December 31. Alejandro uses the straight-line method to amortize and bond discounts or premiums.
-If the bonds were purchased for $295,500, how much bond interest revenue should Alejandro recognize in 2010?

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On November 1, 2010, Alejandro Corporation purchased $300,000 of Beluga Corporation's 5%, 10-year bonds payable. Interest is payable on April 30 and October 31. Alejandro's year-end is December 31. Alejandro uses the straight-line method to amortize and bond discounts or premiums.
-If the bonds were purchased for $295,500, how much bond interest revenue should Alejandro recognize in 2010?

Quizplus · Accepted Answer

Alejandro Corporation would recognize bond interest revenue from the interest payments and the amortization of the discount on the bonds. The total interest for a full year on a $300,000 bond at 5% is $15,000. Since the bonds were purchased on November 1, only one interest payment on October 31 is relevant for 2010, which would be for November and December, equating to 2 months of interest. The annual interest is $15,000, so for two months, it would be $15,000 * (2/12) = $2,500. The discount on the bonds ($300,000 - $295,500 = $4,500) is amortized over the 10-year life of the bonds, resulting in an annual amortization of $450 ($4,500 / 10). For two months, this would be $450 * (2/12) = $75. Therefore, the total bond interest revenue recognized in 2010 would be the sum of the interest for two months and the amortization for two months: $2,500 + $75 = $2,575.

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