Question

On January 1, 2014, Enterprise purchased 15-year, 6% bonds having maturity a value of $474,000. Interest is paid annually on December 31 and the bonds provide the bondholders a 5% yield. Pacific Enterprise uses the effective-interest method to amortize discount or premium. At the time of acquisition, the bonds were classified as trading. The fair value of the bonds on December 31, 2018 is $489,000. The fair value of the bonds as of December 31 of the immediately preceding year (prior measurement date) was $442,000. What is the amount of net income recognized in the 2018 income statement solely as a result of these bonds? Please show work!

Answer 1

FV	$474,000			Year	Cash Interest	Interest Revenue(5% x CV)	Premium amortization	Carrying Value
PMT	28440	(474000 x 6%)			A	B	C = A-B
NPER	15			1-Jan-14				$523,199.58
Rate	5%			31-Dec-14	28,440.00	26,159.98	2,280.02	520,919.56
PV	($523,199.58)			31-Dec-15	28,440.00	26,045.98	2,394.02	518,525.54
	=PV(5%,15,28440,474000)			31-Dec-16	28,440.00	25,926.28	2,513.72	516,011.81
				31-Dec-17	28,440.00	25,800.59	2,639.41	513,372.40
So price of bonds is $523,199.58				31-Dec-18	28,440.00	25,668.62	2,771.38	510,601.02
Premium	$49,199.58	(523199.58-474000)		31-Dec-19	28,440.00	25,530.05	2,909.95	507,691.08
				31-Dec-20	28,440.00	25,384.55	3,055.45	504,635.63
				31-Dec-21	28,440.00	25,231.78	3,208.22	501,427.41
				31-Dec-22	28,440.00	25,071.37	3,368.63	498,058.78
				31-Dec-23	28,440.00	24,902.94	3,537.06	494,521.72
				31-Dec-24	28,440.00	24,726.09	3,713.91	490,807.81
				31-Dec-25	28,440.00	24,540.39	3,899.61	486,908.20
				31-Dec-26	28,440.00	24,345.41	4,094.59	482,813.61
				31-Dec-27	28,440.00	24,140.68	4,299.32	478,514.29
				31-Dec-28	28,440.00	23,925.71	4,514.29	474,000.00
				Interest revenue formula = Beginning Carrying Value x 5%
				Premium Amortization = Cash interest - Interest revenue
				Carrying value as calculated above
				Cash interest = 474000 x 6%
Fair Value as on December 31, 2017 is $442,000 and Carrying Value was 513,372.40
Securities valuation account Balance (513,372.40 - 442,000) $71,372.40 Credit
Fair Value as on December 31, 2018 is $489,000 and Carrying Value was 510,601.02
Securities valuation account Balance (510,601.02 - 489,000) $21,601.02 Credit
Securities valuation account balance req on Dec 31, 2018						21,601.02	cr
Securities valuation account balance on Dec 31, 2017						71,372.40	Cr
Net Gain due to change in securities Valuation						49,771.38	(71372.40-21601.02)
Add: Interest Revenue for Dec 31, 2018						25,668.62
Net Income to be recognised in 2018 due to bond investment						75,440.00	(49771.38+25668.62)
Note: Since Securities valution account balance going to Dr By 49,771.38 in 2018 and Net Gain Cr by 49,771.38
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