Use the following information to solve the following questions:
On July 1, 2020, 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, 2020 is
A) $ 8,415.
B) $ 8,000.
C) $ 7,585.
D) $ 415.

Question

Quizplus · Accepted Answer

The bond discount to be amortized on December 31, 2020, is calculated using the effective interest method. First, find the interest income for the period: $186,992 (purchase price) * 9% (market rate) / 2 (for semi-annual) = $8,415. Then, calculate the actual cash received from the bond's coupon payment: $200,000 (par value) * 8% (coupon rate) / 2 = $8,000. The difference between the interest income and the cash received is the amount of discount amortized: $8,415 - $8,000 = $415.

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