Question

In: Accounting

Carras Corporation purchased $60,000 of five-year, 6% bonds of Hu Inc. for $55,133 to yield an...

Carras Corporation purchased $60,000 of five-year, 6% bonds of Hu Inc. for $55,133 to yield an 8% return, and classified the purchase as an amortized cost method investment. The bonds pay interest semi-annually.

(a)Assuming Carras Corporation applies IFRS, prepare its journal entries for the purchase of the investment and the receipt of semi-annual interest and discount amortization for the first two interest payments that will be received. Round amounts to the nearest dollar.

(b)Assuming Carras applies ASPE and has chosen the straight-line method of discount amortization, prepare the same three entries requested in part (a), rounding amounts to the nearest dollar.

Solutions

Expert Solution

a)

Face value of bond = 60000

Cash paid for purchase of bond = 55133

Discount on purchase of bond = 60000 - 55133 = 4867

Life of bond = 5 years i.e. 5*2 = 10 periods

Journal entry for purchase of bond

Investment in Bond Dr 60000

Cash Cr 55133

Discount on Bond Receivable Cr 4867

Journal entry for receipt of semi-annual interest and discount amortization for the first interest payments

Interest income for the first semi annual period = 55133*8%*1/2 = 2205.32 i.e. 2205

Cash received in first semi annual period = 60000*6%*`1/2 = 1800

Discount amortised = 2205 - 1800 = 405

Journal:

Cash Dr 1800

Discount on Bond Receivable Dr 405

Interest income Cr 2205

Journal entry for receipt of semi-annual interest and discount amortization for the second interest payments

Interest income for the second semi annual period = (55133 + 405)*8%*1/2 = 2221.52 i.e. 2222

Cash received in first semi annual period = 60000*6%*`1/2 = 1800

Discount amortised = 2222 - 1800 = 422

Journal:

Cash Dr 1800

Discount on Bond Receivable Dr 422

Interest income Cr 2222

b)

Discount amortised as per straight line method = Total discount/Life of bond in semi annual periods = 4867/10 = 486.7 i.e. 487

Journal entry for purchase of bond

Investment in Bond Dr 60000

Cash Cr 55133

Discount on Bond Receivable Cr 4867

Journal entry for receipt of semi-annual interest and discount amortization for the first interest payments

Cash Dr 1800

Discount on Bond Receivable Dr 487

Interest income Cr 2287

Journal entry for receipt of semi-annual interest and discount amortization for the second interest payments

Cash Dr 1800

Discount on Bond Receivable Dr 487

Interest income Cr 2287

ekkarill92 answered 2 years ago
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