On July 1,Year 1,Fairfield Company purchased $2 million of Hampton Corporation's 6% bonds for $1,731,590.The bonds were purchased to yield 8% interest and were classified as held-to-maturity securities.The bonds mature in 10 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?

Question

Quizplus · Accepted Answer

Under the effective interest method of amortization, the interest revenue for the year is calculated as ($2,000,000 x 6%) = $120,000. Since the bonds were purchased to yield 8% interest, the amortization of the discount is calculated as ($120,000 - $173,159) = $53,159. The carrying value of the bonds at December 31, Year 1 is calculated as ($1,731,590 + $53,159) = $1,784,749, which is option B.

On July 1,Year 1,Fairfield Company Purchased $2 Million of Hampton