On January 1, 2021, a company acquires $480,000 of another company’s 15% bonds at a price...

On January 1, 2021, a company acquires $480,000 of another company’s 15% bonds at a price of $630,000. For the investor company, interest is received on January 1 of each year, and the bonds mature on January 1, 2031. The investment will provide the investor a 10% yield (assumed, for ease of computation; do not attempt computation beyond the years necessary). The bonds are classified as held-to-maturity. Using the effective interest method, what is the amount the investor company will record for Debt Investments on 12/31/2022?

Expert Solution

Worknig Notes: 1
	Calculation of Discount amount amortized per year
		Par Value of the Bonds =	$ 630,000
		Issued price	$ 480,000
		Discount to be amortized	$ 150,000
		Rate of interest of Coupon	7%
		Yearly Coupon Amount	$ 44,100

		Market Rate of interest =	10%

SOLUTION :
	Schedule of Interest revenue and bond premium Amortization
	Effective interest Method
	Date	Cash Received	Interest Revenue @ 10.00% on Carrying Amount	Increase in Carrying Value	Caryying Amount
	Jan 01.2021				$ 480,000
	Jan 01.2022	$ 44,100	$ 48,000	$ 3,900	$ 483,900
	Jan 01.2023	$ 44,100	$ 48,390	$ 4,290	$ 488,190


	Carrying amount of Bonds as on Jan 01.2023 or Dec 31. 2022 is $ 488,190

	So Answer = Value of Debt investment on 12/31/2022 = $ 488,190

ekkarill92 answered 1 year ago

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