Question

Herkimer Quiroz Associates acquired $7,530,000 par​ value, 4%​, 20​-year bonds on their date of​ issue, January 1 of the current year. The market rate at the time of issue is 18% and interest is paid semiannually on June 30 and December 31. Quiroz uses the effective interest rate method to account for this investment. Quiroz does not intend to hold the investment until maturity nor will it actively trade the bonds. The fair value of the bonds at the end of the year of acquisition is $5,198,100.

a.	Determine the purchase price of the investment in bonds.
b.	Prepare the journal entry to record the acquisition of the bond investment.
c.	Prepare the journal entries to record the interest income for the first year.
d.	Prepare the journal entry required to adjust the​ investment's carrying amount to fair value at year​ end, if necessary.

Answer 1

Solution a:

Computation of bond price
Table values are based on:
n=	40
i=	9%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.03184	$7,530,000	$239,737
Interest (Annuity)	10.75736	$150,600	$1,620,058
Price of bonds			$1,859,795

Solution b:

Journal Entries - Herkimer Quiroz Associates
Date	Particulars	Debit	Credit
1-Jan	Investment in bond Dr	$7,530,000.00
	To Cash		$1,859,795.00
	To Discount on bond investment		$5,670,205.00
	(To record purchase of bond at discount)

Solution c:

Journal Entries - Herkimer Quiroz Associates
Date	Particulars	Debit	Credit
30-Jun	Cash Dr	$150,600.00
	Discount on bond investment Dr	$16,782.00
	To Interest revenue ($1,859,795*9%)		$167,382.00
	(To record interest revenue and discount amortization of bond)
31-Dec	Cash Dr	$150,600.00
	Discount on bond investment Dr	$18,292.00
	To Interest revenue [($1,859,795+$16,782)*9%]		$168,892.00
	(To record interest revenue and discount amortization of bond)

Solution d:

Journal Entries - Herkimer Quiroz Associates
Date	Particulars	Debit	Credit
31-Dec	Fair value adjustment Dr [$5,198,100 - ($1,859,795+$16,782 + $18,292)]	$3,303,231.00
	To Unrealized holding gain or loss - OCI		$3,303,231.00
	(To record fair value adjustment on bond investment)