On November 1, 2020, Fluck Corp. purchased 10-year, 9%, bonds with a face value of $ 360,000, for $ 324,000. An additional $ 10,800 was paid for the accrued interest, which is paid semi-annually on January 1 and July 1. The bonds mature on July 1, 2027 and will be held to maturity. Fluck uses the straight-line method of amortization and the amortized cost method for these bonds. Ignoring income taxes, the amount to be reported in Fluck's 2020 income statement as a result of this investment is

Question

Quizplus · Accepted Answer

The amount to be reported in Fluck's 2020 income statement includes interest revenue and amortization of the bond discount. The interest revenue is calculated based on the face value of the bonds, the interest rate, and the portion of the year they were held. Since the bonds were purchased on November 1 and interest is paid semi-annually on January 1 and July 1, Fluck would receive interest for two months (November and December) in 2020. The annual interest payment on the bonds is 9% of $360,000, which equals $32,400. For two months, this amounts to $32,400 * (2/12) = $5,400. The bond was purchased at a discount ($324,000 instead of $360,000), and this discount is amortized over the life of the bond using the straight-line method. The total discount is $360,000 - $324,000 = $36,000. Over 10 years, or 120 months, the monthly amortization amount is $36,000 / 120 = $300. For the two months in 2020, this amounts to $600. The total amount to be reported in the income statement is the sum of the interest revenue and the amortization of the discount, which is $5,400 + $600 = $6,000. However, the correct calculation should consider the full period's interest and amortization, not just for two months, leading to a reconsideration of the correct answer based on the full year's impact and the specifics of the question's scenario.