On January 1,2016,Rupar Retailers purchased $100,000 of Anand Company bonds at a discount of $5,000.The Anand bonds pay 6% interest but were purchased when the market interest rate was 7% for bonds of similar risk and maturity.The bonds pay interest semiannually on January 1 and July 1 of each year.Rupar accounts for the bonds as a held-to-maturity investment,and uses the effective interest method.In Rupar's December 31,2016 journal entry to record the second period of interest,Rupar would record a credit to interest revenue of:

Question

Quizplus · Accepted Answer

The effective interest method calculates interest revenue based on the carrying amount of the bond and the market interest rate at the time of purchase. The carrying amount at the beginning of the second period is $95,000 (initial purchase price) plus the amortized discount from the first period. The interest revenue for the second period is calculated as the carrying amount multiplied by the market rate (7% annually, or 3.5% semiannually).

On January 1,2016,Rupar Retailers Purchased $100,000 of Anand Company Bonds