On January 1, 2021, an investor paid $295,000 for bonds with a face amount of $315,000. The contract rate of interest is 8% while the current market rate of interest is 11%. Using the effective interest method, how much interest income is recognized by the investor in 2022 (assume annual interest payments and amortization)

The amount of interest income recognized by the investor in 2022 is $33,247.50.

Explanation:

We are given the following in the question:

Amount paid by an investor = $295,000

Bond face amount =  $315,000

Contract interest rate = 8%

Current market interest rate = 11%.

Therefore, we have:

Interest amount paid in cash = Bond face amount * Contract interest rate = $315,000 * 8% = $25,200

Amount recognized as interest expense by bond issuer = Amount paid by an investor * Current market interest rate = $295,000 * 11% = $32,450

Bond’s carrying value on 31 December 2021 = Amount paid by the investor + Amount recognized as interest expense by bond issuer - Interest amount paid in cash = $295,000 + $32,450 - $25,200 = $302,250

Year 2022 interest income = $302,250 * 11% = $33,247.50

Therefore, the amount of interest income recognized by the investor in 2022 is $33,247.50.

both are integral parts of a corporate balance sheet. the cash flow statement, or statement of cash flows, measures the sources of a company's cash and its uses of cash over a specific time period. the income statement measures a company's financial performance, such as revenues, expenses, profits or losses over a specific time period (in fact, it's sometimes called a statement of financial performance).

a cash flow statement shows exactly how much money a company has received and how much it has spent, traditionally over a period of one month. it captures the current operating results and changes on the balance sheet, such as increases or decreases in accounts receivable or accounts payable, and does not include noncash accounting items such as depreciation and amortization. the cash flow generally comes from revenue received as a result of business activity, but it may be augmented by funds available as a result of credit. a cash flow statement is used to determine the short-term viability and liquidity of a company, specifically how well it is positioned to pay its bills and vendors.