Question

On January 1, 2021, Larkspur Inc., a public company, purchased $570,000 of Pearl Corporation’s five-year, 5% bonds for $595,600 when the market interest rate was 4%. Interest is received semi-annually on July 1 and January 1. Larkspur’s year end is December 31. Larkspur intends to hold Pearl’s bonds until January 1, 2026, the date the bonds mature. The bonds’ fair value on December 31, 2021, was $580,000.

1) Record the purchase of the bonds on January 1, 2021. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

2)

Prepare the entry to record the receipt of interest on July 1, 2021. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,276.)

3) Prepare the adjusting entry required at December 31, 2021. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,276.)

4)

Show the financial presentation of the bonds for Larkspur on December 31, 2021. (Round answers to 0 decimal places, e.g. 5,276.)

5)

Prepare the entry to record the receipt of interest on January 1, 2022. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

6) Prepare the entry to record the receipt on maturity of the bonds on January 1, 2026. Assume the entry to record the last interest payment has been recorded. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

7) How would your answers to parts (a) through (c) change if the bonds were purchased for the purpose of trading? (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,276.

8)

Answer 1

On January 1, 2021, Larkspur Inc., a public company, purchased $570,000 of Pearl Corporation’s five-year, 5% bonds for $595,600 when the market interest rate was 4%. Interest is received semi-annually on July 1 and January 1. Larkspur’s year end is December 31. Larkspur intends to hold Pearl’s bonds until January 1, 2026, the date the bonds mature. The bonds’ fair value on December 31, 2021, was $580,000.

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1) Record the purchase of the bonds on January 1, 2021

2) Prepare the entry to record the receipt of interest on July 1, 2021

Amortized premium = 25600 / 10 period = 2560 each semi annual period

3) Prepare the adjusting entry required at December 31, 2021.

* The cost of a held to maturity investment is not adjusted to fair value during the holding period; there is no point in doing so, since (as the name implies) the holder intends to retain ownership until the maturity date of the investment, at which point the face value of the investment will be redeemed.

Date	Accounts & Explanation	Debit	Credit
(1) Jan 1	Investment in Bond– Held to maturities	$570000
	Premium on Bond ( 595600 – 570000)	25600
	Cash		$595600
	( To record purchase of bond on premium )
(2) July 1	Cash ( 570000 * 2.5% )	$14250
	Premium on Bond		$2560
	Interest Revenue ( 14250 – 2560 )		$11690
	(To record interest income )
(3) Dec 31	No entry

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4) Show the financial presentation of the bonds for Larkspur on December 31, 2021

.

The Larkspur Inc investment in Pearl Corporation’s is shown on the balance sheet as follows:

Held-to-Maturity Investments

Corporate bonds —————— $570000

Plus: unamortized premium —– 23040*

Book value (amortized cost)—- $593040

.

· Un amortized premium = Bond premium – amortized premium

       Bond premium = 25600

       Amortized premium = 2560

       Un amortized premium = 25600 – 2560 = 23040

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5) Prepare the entry to record the receipt of interest on January 1, 2022

Date	Accounts & explanation	Debit	Credit
Jan 1	Cash ( 570000 * 2.5% )	$14250
	Premium on Bond		$2560
	Interest Revenue ( 14250 – 2560 )		$11690
	(To record interest income )

.

6) Prepare the entry to record the receipt on maturity of the bonds on January 1, 2026. Assume the entry to record the last interest payment has been recorded

.

Date	Accounts & explanation	Debit	Credit
Jan 1	Cash	$570000
	Investment in Bond – Held to maturities		$570000
	( To record redemption of at maturities )

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6) How would your answers to parts (a) through (c) change if the bonds were purchased for the purpose of trading?

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1 Record the purchase of the bonds on January 1, 2021

2 Prepare the entry to record the receipt of interest on July 1, 2021

Amortized premium = 25600 / 10 period = 2560 each semi annual period

3 Prepare the adjusting entry required at December 31, 2021.

Ø Changes in the fair value of a held-for-trading security from one period to another become an unrealized gain or loss to net income.

Fair value = $580000

Book value = 595600

Unrealized loss on bond = 595600 – 580000 = 15600

.

Date	Accounts & Explanation	Debit	Credit
(1) Jan 1	Investment in Bond - Trading	$595600
	Cash		$595600
	( To record purchase of bond on for trading )
(2) July 1	Cash ( 570000 * 2.5% )	$14250
	Interest Revenue ( 14250 – 2560 )		$14250
	(To record interest income )
(3) Dec 31	Unrealized Loss on Investment in Bond	$15600
	Investment in Bond - Trading		$15600
	( To record adjustment for fair value )

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