On January 1, 2013, Ithaca Corp. purchases Cortland Inc. bonds that have a face
ID: 2453648 • Letter: O
Question
On January 1, 2013, Ithaca Corp. purchases Cortland Inc. bonds that have a face value of $160,000. The Cortland bonds have a stated interest rate of 5%. Interest is paid semiannually on June 30 and December 31, and the bonds mature in 10 years. For bonds of similar risk and maturity, the market yield on particular dates is as follows (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):
Calculate the price Ithaca would have paid for the Cortland bonds on January 1, 2013 (ignoring brokerage fees).
Prepare all appropriate journal entries related to the bond investment during 2013, assuming Ithaca accounts for the bonds as a held-to-maturity investment. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.)
Prepare all appropriate journal entries related to the bond investment during 2013, assuming that Ithaca chose the fair value option when the bonds were purchased, and that Ithaca determines fair value of the bonds semiannually. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.)
On January 1, 2013, Ithaca Corp. purchases Cortland Inc. bonds that have a face value of $160,000. The Cortland bonds have a stated interest rate of 5%. Interest is paid semiannually on June 30 and December 31, and the bonds mature in 10 years. For bonds of similar risk and maturity, the market yield on particular dates is as follows (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):
Explanation / Answer
1. Bond Price = [4000*Cumulative PVF @ 3% for 20 periods] + [160000*PVF for 20th period @3%]
= [4000*14.877] + [160000*0.554]
= $148148
Ithaca would have paid $148148 for the Cortland bonds on January 1, 2013.
2. Journal Entries
Date Particulars Debit Credit 2013 Jan 1 Investment in Bonds 148148 Cash 148148 June 30 Cash 4000 Investment in Bonds[(160000-148148)*6/120] 593 Interest Income 4593 Dec 31 Cash 4000 Investment in Bonds[(160000-148148)*6/120] 593 Interest Income 4593Related Questions
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