2. On 1/1/2017 the Cash Heavy Company had a single investment in bonds. It had p
ID: 2594055 • Letter: 2
Question
2.
On 1/1/2017 the Cash Heavy Company had a single investment in
bonds. It had purchased the bonds for $12,000,000 at 9 am on
12/31/2016. During the day, the bonds declined in value from
$12,000,000 to $11,900,000. The bonds had a face value of
$12,500,000, a stated interest rate of 5% payable each six months
with interest payable 6/30 and 12/30, and were scheduled to mature
on 12/30/2023.
On 12/31/2017, the market value of the bonds was $11,950,000
On 12/31/2018, the market value of the bonds was $11,975,000
Assume the Cash Heavy Company accounted for the bonds as a
trading security?
a. What interest income would the Cash Heavy Company record for
the year ending 2017?
$ _____________
b. What interest income would the Cash Heavy Company record for
the year ending 2018?
$ _____________
c. What unrealized gain or loss would the Cash Heavy Company
record for the year ending 2017?
$ _____________
d. What pretax unrealized gain or loss would the Cash Heavy
Company record in Other Comprehensive Income for the year
ending 2018?
$ _____________
e. Would the valuation account used to mark the bond investment to
market value on the balance sheet differ depending on whether the
bond was accounted for as a Trading Security or as an Available for
Sale Security?
Circle:
It would differ
It would not differ
Explanation / Answer
a. Interest income for the year 2017
Interest income each six months = 1250000 x 5% = $625,000
Interest income for year 2017 = $625,000 x 2 = $1,250,000
NOTE: Interest is given at 5% each six months, this means that interest on bond is 10% p.a.
b. Interest income for 2018 = $1,250,000.
c. Unrealized gain or loss on bond in 2017
Unrealized gain or loss to be booked in 2017 = Fair value of bond at the end of 2017 - Fair value of bond at the end of 2016.
Unrealized gain or loss = $11,950,000 - 11,900,000 = $50,000
d. Unrealized gain or loss in 2018.
Unrealized gain or loss to be booked in 2018 = Fair value of bond at the end of 2018 - Fair value of bond at the end of 2017.
Unrealized gain or loss = $11,975,000- 11,950,000 = $25,000
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