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Question 2 On December 31, 20x0, you purchase $200,000 of the bonds of Underwood Inc. The...

Question 2

On December 31, 20x0, you purchase $200,000 of the bonds of Underwood Inc. The bonds mature on December 31, 20x15, pay interest of 3% and were purchased to yield 2.6%. Transaction costs of $3,500 were incurred. Coupon payments are received every June 30 and Dec 31. At December 31, 20x1 the bonds were yielding 2.3% and at December 31, 20x2 were yielding 2.8%.

Required – Prepare all journal entries for 20x0, 20x1 and 20x2 assuming that the bonds are classified as…

a. Amortized Cost

b. FVTOCI

Solutions

Expert Solution

(a)
Date General Journal Debit Credit
Working
Dec 31, 20x0 Amortized Cost Investments $207,228 0.87883 175766
Cash $207,228
9.32066 27962
June 30, 20x1 Cash $3,000 203728
Amortized Cost Investments $306 3500
Investment income ($203,728 x 1.3%) $2,694 407456
Dec 31, 20x1 Cash $3,000
Amortized Cost Investments $310
Investment income [($203,728 - $352) x 1.3%] $2,690
June 30, 20x2 Cash $3,000
Amortized Cost Investments $361
Investment income ($203,020 x 1.3%) $2,639
Dec 31, 20x2 Cash $3,000
Amortized Cost Investments $365
Investment income [($203,020 - $361) x 1.3%] $2,635
Working
N = 10, I = 1.3, PMT = 200,000 x 3% / 2 = $3,000, FV = 200,000 CPT PV = $203,728
(b) Date General Journal Debit Credit
Working
Dec 31, 20x0 Investment in FVOCI-Bond $207,228 0.87883 175766
Cash $207,228
9.32066 27962
June 30, 20x1 Cash $3,000 203728
Investment in FVOCI-Bond $306 3500
Investment income ($203,728 x 1.3%) $2,694 407456
Dec 31, 20x1 Cash $3,000
Investment in FVOCI-Bond $310
Investment income [($203,728 - $352) x 1.3%] $2,690
Working
Dec 31, 20x1 Investment in FVOCI-Bond $1,944 0.91258 182516
Holding Gain – OCI – Investment in FVOCI-Bonds $1,944
($205,320 - $203376) 7.60138 22804
205320
June 30, 20x2 Cash $3,000
Investment in FVOCI-Bond $639
Investment income ($205,320 x 1.15%) $2,361
Dec 31, 20x2 Cash $3,000
Investment in FVOCI-Bond $646
Investment income [($205,320 - $639) x 1.15%] $2,354
Dec 31, 20x2 Holding loss – OCI – Investment in FVOCI-Bonds $2,892 0.919967 183993
Investment in FVOCI-Bond $2,892
($201,143 - $204,035) 5.716639 17150
201143

ekkarill92 answered 1 year ago
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