On July 1,2014,Tipper Corp.purchased $100,000 of 8% bonds at face value.Interest is paid annually on June 30.If the accounting year for Tipper ends at December 31,2014,what will be reported with respect to the bonds on that date?

Question

Quizplus · Accepted Answer

Since the accounting year ends on December 31, 2014, only 6 months of interest (from July 1, 2014 to December 31, 2014) have been accrued but not yet received. Therefore, interest income of $4,000 (8% x $100,000 x 6/12) will be accrued and reported on the December 31, 2014 financial statements. The carrying value of the bonds will still be $100,000 as no amortization is required when bonds are purchased at face value, and no cash received in interest will be reported until the following year when the interest payment is actually received on June 30, 2015. There is no loss to report as the bonds were purchased at face value and will be received at face value upon maturity.