On January 1, 2009, an investor paid $291,000 for bonds with a face amount of $300,000. The contract rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2010 (assume annual interest payments and amortization)?

Question

Quizplus · Accepted Answer

Using the effective interest method, interest income is calculated based on the carrying value of the investment multiplied by the market rate of interest. In 2010, the carrying value of the investment would be the initial investment of $291,000 plus the amortized discount from 2009, which can be calculated as ($300,000 - $291,000) = $9,000. The amortized discount for 2010 would then be ($9,000 / 10) = $900. Therefore, the carrying value of the investment at the end of 2010 would be $291,900. Interest income for 2010 would be ($291,900 x 10% = $29,190) plus the amortized discount of $900, for a total interest income of $29,610. Therefore, the correct answer is D.

On January 1, 2009, an Investor Paid $291,000 for Bonds