Question

On January 1, 2021, Ithaca Corp. purchases Cortland Inc. bonds that have a face value of $230,000. The Cortland bonds have a stated interest rate of 6%. Interest is paid semiannually on June 30 and December 31, and the bonds mature in 10 years. For bonds of similar risk and maturity, the market yield on particular dates is as follows: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):

January 1, 2021	8.0	%
June 30, 2021	9.0	%
December 31, 2021	10.0	%

Required:
1. Calculate the price Ithaca would have paid for the Cortland bonds on January 1, 2021 (ignoring brokerage fees), and prepare a journal entry to record the purchase.
2. Prepare all appropriate journal entries related to the bond investment during 2021, assuming Ithaca accounts for the bonds as a held-to-maturity investment. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds.
3. Prepare all appropriate journal entries related to the bond investment during 2021, assuming that Ithaca chose the fair value option when the bonds were purchased, and that Ithaca determines fair value of the bonds semiannually. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds.

Answer 1

Solution:

1) The price Ithaca would have paid for the Cortland bonds on January 1, 2021 and journal entry to record puchase:

Period	Cash flow	Amount ($)	PVAF /PVF @ 4%	Present value
1-20	Interset	6,900	13.5903	93,773
20	Principal	230,000	0.4564	104,972
				198,745

The price Ithaca would have paid for the Cortland bonds on January 1, 2021 is $198,745

Journal Entries

Date	Particulars	Debit ($)	Credit ($)
1st jan 2021	Investment in bond	230,000
	To Discount on bond investment		31,255
	To Cash		198,745

2) Journal entries related to the bond investment during 2021, assuming Ithaca accounts for the bonds as a held-to-maturity investment:

Date	Particulars	Debit ($)	Credit ($)
1st jan 2021	Investment in bond	230,000
	To Discount on bond investment		31,255
	To Cash		198,745

Date	Particulars	Debit ($)	Credit ($)
Jun 30 2021	Cash	6,900
	Investment in bond	1,050
	To Interest		7950

Date	Particulars	Debit ($)	Credit ($)
Dec 31 2021	Cash	6,900
	Investment in bond	1,092
	To Interest		7992

3) Journal entries related to the bond investment during 2021, assuming that Ithaca chose the fair value option when the bonds were purchased and that Ithaca determines the fair value of the bonds semiannually:

Date	Particulars	Debit ($)	Credit ($)
1st jan 2021	Investment in bond	230,000
	To Discount on bond investment		31,255
	To Cash		198,745

Date	Particulars	Debit ($)	Credit ($)
Jun 30 2021	Cash	6,900
	Discount on bond investment	1,050
	To Interest		7950

Date	Particulars	Debit ($)	Credit ($)
Dec 31 2021	Cash	6,900
	Discount on bond investment	1,092
	To Interest		7992