Question

On April 1, 1989, Saxe, Inc. purchased $200,000 face value, 9% U.S. Treasury Notes for $198,500, including accrued interest of $4,500. The notes mature July 1, 1990, and pay interest semiannually on January 1 and July 1. Saxe uses the straight-line method of amortization. The notes were sold on December 1, 1989 for $206,500, including accrued interest of $7,500. In its October 31, 1989 balance sheet, the carrying amount of this investment should be

Answer 1

• All working forms part of the answer
• The correct answer is: $ 196,800 will be the carrying amount of Investment on Oct 31, 1989 Balance Sheet.
• Note that period from 1 April 1989 to Oct 31 1989 = 7 months.
• Working for above answer:

A	Purchase Price (including accrued interest)	$        198,500.00
B	Accrued Interest receivables	$             4,500.00
C = A - B	Purchase price	$        194,000.00
D	Face Value	$        200,000.00
E = D - C	Discount	$             6,000.00
F	Purchased on	01-Apr-89
G	Maturity Date	01-Jul-90
H = G - F [April to June = 15 months]	No. of months	15 months
I = E/H	Monthly Amortisation	$                400.00
J = I x 7 months [April to Oct = 7 months]	Amortisation till Oct 31, 1989 [ 400 x 7 months]	$             2,800.00
K = C	Purchase price calculated above	$        194,000.00
L = J + K	Carrying Amount of Investment on Oct 31, 1989 Balance Sheet = ANSWER	$        196,800.00 = ANSWER