Question
In: Accounting
On January 1, 2021, Ithaca Corp. purchases Cortland Inc. bonds that have a face value of...
On January 1, 2021, Ithaca Corp. purchases Cortland Inc. bonds that have a face value of $340,000. The Cortland bonds have a stated interest rate of 5%. 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)
| January 1, 2021 | 6.0 | % |
| June 30, 2021 | 7.0 | % |
| December 31, 2021 | 8.0 | % |
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. Record the purchase of Cortland bonds on
January 1, 2021.
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 the fair value of the bonds semiannually. Ithaca
calculates interest revenue at the effective interest rate as of
the date it purchased the bonds.
Solutions
Expert Solution
Answer-1:
Bonds price Ithaca would have paid = $314,708
| Date | Account Name | Debit | Credit |
| Jan.01 2021 | Investment in bond | $ 340,000 | |
| Discount on bond investment | $ 25,292 | ||
| Cash | 314,708 |
Answer-2:
| Date | Account Name | Debit | Credit |
| Jun.30 2021 | Cash | 8,500 | |
| Investment in bond | 941 | ||
| Interest revenue | 9,441 | ||
| Dec.31 2021 | Cash | 8,500 | |
| Investment in bond | 969 | ||
| Interest revenue | 9,469 |
Answer-3:
| Date | Account Name | Debit | Credit |
| Jan.01 2021 | Investment in bond | $ 340,000 | |
| Discount on bond investment | $ 25,292 | ||
| Cash | 314,708 | ||
| Jun.30 2021 | Cash | 8,500 | |
| Discount on bond investment | 941 | ||
| Interest revenue | 9,441 | ||
| Dec.31 2021 | Cash | 8,500 | |
| Discount on bond investment | 969 | ||
| Interest revenue | 9,469 |
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