A is corrent. When the interest method of amortization is used, interest revenue is computed directly, and the amount of discount amortization is computed indirectly as follows:
| Interest | | Stated or | | Discount |
| Revenue | – | cash interest | = | amortizations |
In this case, the
interest revenue cannot be computed directly because the effective or yield rate
is not given. However, the stated or cash interest can be computed ($500,000 ×
8% × 6/12 = $20,000) and the discount amortization is given ($1,800). Thus the
interest revenue can be computed indirectly as indicated below.
| Interest revenue | – | $20,000 | = | $1,800 |
| Interest revenue | = | $20,000 | + | $1,800 |
| Interest revenue | = | $21,800 | | |
B is incorrect. When the interest method of amortization is used, interest revenue is computed directly, and the amount of discount amortization is computed indirectly as follows:
| Interest | | Stated or | | Discount |
| Revenue | – | cash interest | = | amortizations |
In this case, the
interest revenue cannot be computed directly because the effective or yield rate
is not given. However, the stated or cash interest can be computed ($500,000 ×
8% × 6/12 = $20,000) and the discount amortization is given ($1,800). Thus the
interest revenue can be computed indirectly as indicated below.
| Interest revenue | – | $20,000 | = | $1,800 |
| Interest revenue | = | $20,000 | + | $1,800 |
| Interest revenue | = | $21,800 | | |
C is incorrect. When the interest method of amortization is used, interest revenue is computed directly, and the amount of discount amortization is computed indirectly as follows:
| Interest | | Stated or | | Discount |
| Revenue | – | cash interest | = | amortizations |
In this case, the
interest revenue cannot be computed directly because the effective or yield rate
is not given. However, the stated or cash interest can be computed ($500,000 ×
8% × 6/12 = $20,000) and the discount amortization is given ($1,800). Thus the
interest revenue can be computed indirectly as indicated below.
| Interest revenue | – | $20,000 | = | $1,800 |
| Interest revenue | = | $20,000 | + | $1,800 |
| Interest revenue | = | $21,800 | | |
D is incorrect. When the interest method of amortization is used, interest revenue is computed directly, and the amount of discount amortization is computed indirectly as follows:
| Interest | | Stated or | | Discount |
| Revenue | – | cash interest | = | amortizations |
In this case, the
interest revenue cannot be computed directly because the effective or yield rate
is not given. However, the stated or cash interest can be computed ($500,000 ×
8% × 6/12 = $20,000) and the discount amortization is given ($1,800). Thus the
interest revenue can be computed indirectly as indicated below.
| Interest revenue | – | $20,000 | = | $1,800 |
| Interest revenue | = | $20,000 | + | $1,800 |
| Interest revenue | = | $21,800 | | |
