Question

In: Accounting

Zero-coupon bonds 13. On January 1, 20x1, ABC Co. acquired 10%, $100,000 bonds for $94,738. The...

Zero-coupon bonds

13. On January 1, 20x1, ABC Co. acquired 10%, $100,000 bonds for $94,738. The bonds, together with accrued interests, are due on December 31, 20x3. The bonds are measured at amortized cost. The effective interest rate is 12%.

Requirements:

a. How much are the carrying amounts of the interest receivable on December 31, 20x1 and December 20x2, respectively?

b. How much are the carrying amounts of the investment on December 31, 20x1 and December 20x2, respectively?

c. Prepare the journal entries in 20x1 and 20x2

Solutions

Expert Solution

carrying value as on 1/1/2001= 94,738

Interest for 2001= 12%*94,738= 11,368.6

Carrying amount of investment as on 31 December 2001= 106,106.56

Interest for 2002= 12%*106,106.56= 12,732.79

Carrying amount of investment as on 31 December 2002= 118,839.35

Interest for 2003= 12%*118,839.35= 14.260.72

Carrying amount of investment as on 31 December 2003= 1,33,100.72

Journal entries for 2001-

Interest income A/c--- Dr. 11,368.56

To Investment A/c-- 11,368.56

(Interest accounted)

Journal entries for 2002-

Interest income A/c--- Dr. 12,732.79

To Investment A/c-- 12,732.79

(Interest accounted)

Note-

The amortised cost of a financial asset at each reporting date is the net of the following amounts:

(a) the amount at which the financial asset or financial liability is measured at initial recognition;

(b) minus any repayments of the principal;

(c) plus or minus the cumulative amortisation using the effective interest method of any difference between the amount at initial recognition and the maturity amount; and

(d) minus, in the case of a financial asset, any reduction for impairment or uncollectability.


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