Question

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.

Answer 1

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)