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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Interest on bond investments

On February 1, Hansen Company purchased $120,000 of 5% 20-year Knight Company bonds at their face amount plus one month’s accrued interest. The bonds pay interest on January 1 and July 1. On October 1, Hansen Company sold $40,000 of the Knight Company bonds acquired on February 1, plus three months’ accrued interest. On December 31, three Months’ interest was accrued for the remaining bonds.

Determine the interest earned by Hansen Company on Knight Company bonds for the year.

To determine

Bond investment: Bond investments are debt securities which pay a fixed interest revenue to the investor.

To compute: The interest earned during the year by Company H on bond investments

Explanation

Compute the interest earned during the year by Company H on bond investments.

Particulars Amount ($)
Interest earned on $120,000 bonds from February 1 to July 1 $2,500
Interest earned on $40,000 bonds from July 1 to October 1 500
Interest earned on $80,000 ($120,000$40,000) from July 1 to December 31 2,000
Total interest earned on bonds during the year $5,000

Table (1)

Working Notes:

Compute amount of interest received on $120,000 from February 1 to July 1 (5 months).

Interest received = {Amount of debt investment × Rate of interest×Time period}= $120,000×5%×512= $2,500

Compute amount of interest received on $40,000 from July 1 to October 1 (3 months)

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