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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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jepessoa

Answer:

$5,000

Explanation:

interest earned on the first coupon = ($120,000 x 5% x 6/12) - ($120,000 x 5% x 1/12) = $2,500

interests earned until October (for the $40,000) = $40,000 x 5% x 3/12 = $500

interests earned until December (for $80,000) = $80,000 x 5% x 6/12 = $2,000

total interest earned during the year = $2,500 + $500 + $2,000 = $5,000

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