Patton Company purchased $400,000 of 10% bonds of Scott Co. on January 1, 2011, paying $376,100. The bonds mature January 1, 2021; interest is payable each July 1 and January 1. The discount of $23,900 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity.
On July 1, 2011, Patton Company should increase its Held-to-Maturity Debt Securities account for the Scott Co. bonds by
a. $2,392.b. $1,371.
c. $1,196.
d. $686.
Answer: D
($376,100 × .055) - ($400,000 × .05) = $686.
For the year ended December 31, 2011, Patton Company should report interest revenue from the Scott Co. bonds of:
a. $42,392.b. $41,409.
c. $41,368.
d. $40,000.
Answer: B
$376,100 × .055 = $20,686
($376,100 + $686) × .055 - $20,723; $20,686 + $20,723 = $41,409.