Question

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.

Answer 1

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