[Anonymous]

I had a quick question about recognizing accrued interest as interest income. My book had the following example problem:

Acquired $100,000 par value of 10-year bonds at 90 plus accrued interest of $2,500.

Purchase of the bonds:

Investments – Held-to-Maturity

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90,000

Accrued Interest Receivable

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2,500

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Cash

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92,500

Interest received of $5,000

Cash

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$5,000

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Accrued Interest Receivable

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2,500

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Interest Income

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2,500

My question is why are we only recognizing $2,500 of income when we received $5,000? Maybe I’m just not understanding what accrued interest is. Was the accrued interest earned in a previous period and we’re now just getting cash for it? So the income we’re recognizing in the second entry is actually the interest earned in this period?

[Anonymous]

You only recognize $2,500 of interest income because the other $2,500 was your money to begin with. You can't earn it twice. If you buy a bond between interest dates, you have to pay the accrued interest to the issuer because on the interest date their computers are going to spit out a bunch of checks for $5,000.

I don't understand why the solution says “Accrued” Interest Receivable. It's just Interest receivable. It didn't accrue, which would imply that you earned it over time and you didn't.

[Author]

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