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On October 1, 2020, Berlin Corp
On October 1, 2020, Berlin Corp. purchased 250, $1,000, 9% bonds for $260,000. An additional $7,500 was paid for the accrued interest, which is paid semi-annually on December 1 and June 1. The bonds mature on December 1, 2024 and will be held to maturity. Berlin uses the straight-line method of amortization and the amortized cost model for these bonds. Ignoring income taxes, the amount to be reported in Berlin's 2020 income statement as a result of this investment is
$3,750.
$5,025.
$5,625.
$6,225.
Expert Solution
Computation of Amount to be reported in Berlin's 2020 Income Statement as a result of this investment:
Interest Earned for 2020 (For 3 months) = 250 bonds*$1,000*9%*3/12 = $5,625
Amortization amount for 3 months = ($260,000 - (250*$1,000)) / 50 months * 3 months
= ($260,000 - $250,000)/50*3
= $10,000/50*3
= $600
Amount to be reported in Berlin's 2020 Income Statement as a result of this investment = $5,625-$600 = $5,025
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