3. INVESTOR Corp. was interested in investing in bonds and, on 01/01/2015 purcha
ID: 2479524 • Letter: 3
Question
3. INVESTOR Corp. was interested in investing in bonds and, on 01/01/2015 purchased 10% bonds dated January 1, 2015. These bonds had a face amount of $10 million, pay interest on 06/30 and 12/31, and mature in 10 years. For bonds of similar risk and maturity, the market yield is 12%. INVESTOR Corp. uses the effective interest method. - In GAAP
Please show your work out- step by step
1. Prepare INVESTOR Corp.’s entry to record the bond purchase?
2. Prepare INVESTOR Corp.’s entry on 06/30/2015 and on 12/31/2015 to record interest?
Explanation / Answer
Price of the bond = c × F × (1 (1 + r)-t)/r+F(1 + r)t C=Interest Rate F= Face Value r=Market Interest Rate Price of Bond= Present value of Interest payments+Present value of the bond Price of Bond (500000*(1-(1.06))^-20/.06+10000000/1.06^20 (500000*(1-.3118))/.06)+10000000*.3118 8853000 Principal 10000000 Interest semi annually 500000 No. of payments 10*2 20 A B C D E F G $ Date Interest Payment @5% Interest expenses at 6%*G Amortization of Bond C-B cr, balance in the a/c Bond Discount a/c Credit balance in the Bond payable Carrying value of Bond F-E Credit cash Debit Interest Expense Bond Discount Jan 1,2015 1147000 10000000 8853000 June 30,2015 500000 531180 31180 1115820 10000000 8884180 Dec,31 2015 500000 533051 33051 1082769 10000000 8917231 June 30,2016 500000 535034 35034 1047735 10000000 8952265 Dec,31 2016 500000 537136 37136 1010599 10000000 8989401 June 30,2017 500000 539364 39364 971235 10000000 9028765 Dec,31 2017 500000 541726 41726 929510 10000000 9070490 Accounts Title Dr Cr Jan 1 2015 Bond Investment $10000000 Cash 8853000 Discount on Bond Investment 1147000 (Being bond investment made ) June 30 2015 Cash 500000 Discount on Bond Investment 31180 Interest Revenue 531180 (Being interest received ) Cash 500000 December 31 2015 Discount on Bond Investment 33051 Interest Revenue 533051 (Being interest received )
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