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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.

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 15, Problem 5E
Textbook Problem
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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

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

Explanation of Solution

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

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

ParticularsAmount ($)
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 1500
Interest earned on $80,000 ($120,000$40,000) from July 1 to December 312,000
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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Chapter 15 Solutions

Financial Accounting
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