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In: Accounting

On January 20X2, Lucky Company purchased $5,000,000 of Fire Corp. 3% bonds, classified as a FVTPL....

On January 20X2, Lucky Company purchased $5,000,000 of Fire Corp. 3% bonds, classified as a FVTPL. The bonds pay semi-annual interest each 30 June and 31 December. The market interest rate was 4% o the date of purchase. The bonds mature on 30 December 20X11. At the end of 20X2, the bonds had a fair value of $4,800,000.

1. Calculate the price paid by Lucky.

2. Give entries for the first year assuming that the investment is classified as FVTPL.

Solutions

Expert Solution

Solution 1:

Computation of bond price
Table values are based on:
n= 20
i= 2%
Cash flow Table Value Amount Present Value
Par (Maturity) Value 0.67297 $5,000,000.00 $3,364,857
Interest (Annuity) 16.35143 $75,000.00 $1,226,358
Price of bonds $4,591,214

Solution 2:

Journal Entries - Lucky Company
Date Particulars Debit Credit
1-Jan-20X2 Investment in bond Dr $5,000,000.00
       To Cash $4,591,214.00
       To Discount on bond investment $408,786.00
(To record investment in bond)
30-Jun-20X2 Cash Dr $75,000.00
Discount on bond investment Dr $16,824.00
       To Interest Income ($4,591,214*2%) $91,824.00
(To record interest revenue using effective interest)
31-Dec-20X2 Cash Dr $75,000.00
Discount on bond investment Dr $17,161.00
       To Interest Income [($4,591,214+$16,824)*2%] $92,161.00
(To record interest revenue using effective interest)
31-Dec-20X2 Fair value adjustment Dr ($4,800,000 - $4,591,214 - $16,824 - $17,161) $174,801.00
       To Unrealized holding gain or loss - NI $174,801.00
(To adjust bond investment to fair value)

ekkarill92 answered 2 hours ago
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