Question

On July 1, 2017, Wheeler Company purchased \(4,000,000 of Duggan Company’s 8% bonds, due on July 1, 2024. The bonds, which pay interest semiannually on January 1 and July 1, were purchased for \)3,500,000 to yield 10%. Determine the amount of interest revenue Wheeler should report on its income statement for the

year ended December 31, 2017.

Short answer

The amount of interest revenue Wheeler should report on its income statement is 335,000.

Step-by-step solution

Definition of bond

Bond is a long-term long which large companies and governments generally use. In bonds, a company can raise amounts from the general public by issuing the bonds on a prefixed interest rate.

Calculation of Interest on the bonds

In this, the company purchased two types of bonds one is on 8% purchased on 1^st July and 10% interest on 1^st July 2017. Hence, it is clear from the date the interest on the bonds is calculated for the six months

Interest on the 8% interest bonds:

$\begin{array}{c}\mathbf{Interest}\mathbf{=}\mathbf{Purchase}\mathbf{Price}\mathbf{\times }\mathbf{Interest}\mathbf{Rate}\mathbf{\times }\mathbf{time}\mathbf{period}\\ \mathbf{=}\mathbf{4}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{8}\mathbf{\%}\mathbf{\times }\frac{1}{2}\\ \mathbf{=}\mathbf{160}\mathbf{,}\mathbf{000}\end{array}$

Interest on the 10% interest bond:

$\begin{array}{c}\mathbf{Interest}\mathbf{=}\mathbf{Purchase}\mathbf{Price}\mathbf{\times }\mathbf{Interest}\mathbf{Rate}\mathbf{\times }\mathbf{Time}\mathbf{Period}\\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{500}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\mathbf{\times }\frac{1}{2}\\ \mathbf{=}\mathbf{\$}\mathbf{175}\mathbf{,}\mathbf{000}\end{array}$

Hence the amount of revenue shown in the income statement is $335,000.