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On July 1, 2017, Harry Ltd.purchased $200,000 (par value)of Prince's 8% bonds.Because the market rate was 9%, Harry purchased them for $186,992.The bonds pay interest semi-annually on December 31 and June 30.Harry uses the amortized cost model and the effective-interest method to recognize interest income on bond investments.
-Rounding values to the nearest dollar (if necessary), the bond discount to be amortized on December 31, 2017 is
A)$8,415.
B)$8,000.
C)$7,585.
D)$415.

Question

Quizplus · Accepted Answer

The bond discount to be amortized is the difference between the interest income calculated using the effective interest rate and the actual interest received. The effective interest income for the period is $186,992 * 4.5% = $8,415. The actual interest received is $200,000 * 4% = $8,000. Therefore, the discount amortized is $8,415 - $8,000 = $415.

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