At the end of 2017, shiva purchased 1,000, $1,000, 8% bonds. the carrying value of the...

At the end of 2017, shiva purchased 1,000, $1,000, 8% bonds. the carrying value of the bonds at December 31, 2017 was $984,800. the Bonds mature on march 1, 2021 and pay interest on march 1 and September 1. Shiva sells 500 bonds on September 1, 2018, for $495,000, after the interest has been received. shiva uses straight-line amortization.

What is the gain on sale?

____

Solutions

Expert Solution

Par value of bonds = 1,000 x 1,000
= $1,000,000
Carrying value of 1,000 bonds on December 31, 2017 (purchase price) = $984,800
Discount on bonds = Par value of bonds - Carrying value of bonds on December 31, 2017
= 1,000,000 - 984,800
= $15,200
Maturity date of bonds = March 1, 2021
Maturity period of bonds = 38 months
Amortization of bond discount per month = Discount on bonds/Maturity period of bonds
= 15,200/38
= $400
Date of sale of bonds = September 1, 2018
Bond discount amortized in 8 months (From December 31, 2017 to September 1, 2018) = Amortization of bond discount per month x 8
= 400 x 8
= $3,200
Carrying value of 1,000 bonds on September 1, 2018 = Carrying value of bonds on December 31, 2017 + Bond discount amortized in 8 months
= 984,800 + 3,200
= $988,000
Carrying value of 500 bonds on September 1, 2018 = Carrying value of 1,000 bonds on September 1, 2018 x 500/1,000
= 988,000 x 1/2
= $494,000
Sale price of 500 bonds = $495,000
Gain on sale of bonds = Sale price of 500 bonds - Carrying value of 500 bonds on September 1, 2018
= 495,000 - 494,000
= $1,000

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ekkarill92 answered 1 year ago

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