10-9E_2 - Horngren'S Financial And Managerial Accounting

Question

Accounting for debt investments

Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.

Requirements 

How much cash interest will Advance receive each year from FermaCo?

Step-by-Step Solution

Answer

A business entity will receive $33,000 cash interest each year

Definition of Face Value

Face value can be defined as the value of any security as stated by the security issuer. It is not mandatory that securities must be issued at this value only

Calculation of Cash Interest Received Each Year

$$\begin{gathered} Interest revenue=Face value\times interest rate \\ =\$1,100,000\times 3\% \\ =\$33,000 \end{gathered}$$