On January 1, 2020, Sharp Company purchased $50,000 of Sox Company 6% bonds, at a time...

On January 1, 2020, Sharp Company purchased $50,000 of Sox Company 6% bonds, at a time when the market rate was 5%. The bonds mature on December 31, 2024, and pay interest annually on December 31. Sharp plans to and has the ability to hold the bonds until maturity. Assume that Sharp uses the effective interest method to amortize any premium or discount on investments in bonds. At December 31, 2020, the bonds are quoted at 98. a. Prepare the entry for the purchase of the debt investment on January 1, 2020. b. Prepare the entry for the receipt of interest on December 31, 2020. c. Record the entry to adjust the investment to fair value on December 31, 2020, if applicable

Expert Solution

Purchase price of bonds:

Interest = $50,000 x 6% = $3000; present value of interest = $3000 x 4.32948* = 12988.44

Present value of principal = $50,000 x 0.78353** = 39176.50

Total present value(purchase price) = $52,164.94

*Present value of $1 annuity, n-5 yrs, i=5%

**Present value of $1 , n=5yrs, i = 5%

	6% BONDS PURCHASED TO YIELD 5%
	Date	Cash Received	Interest Revenue	Bond Premium Amortization	Carrying Amount of Bonds
		a	b	c	d
	1/1/20				$ 52,164.94
	12/31/20	3,000.00	2,608.25	391.75	51,773.19
	12/31/21	3,000.00	2,588.66	411.34	51,361.85
	12/31/22	3,000.00	2,568.09	431.91	50,929.94
	12/31/23	3,000.00	2,546.50	453.50	50,476.44
	12/31/24	3,000.00	2,523.82	476.18	50,000.26

	a$3,000 = $50,000 x .06
	b$2,608.25 = $5,164 x .05
	c$391.75 = $3,000 - $2,608.25
	d$51,773.19 = $52,164.94 - $391.75

Date	Accounts title & Explanation			Debit $	Credit $
Jan 1, 2020	Debt Investments			52,164.94
	Cash				52,164.94

Dec 3, 2020	Cash			3,000.00
	Debt Investments				391.75
	Interest Revenue				2,608.25

Dec 3, 2020	Fair value adjustments is not applicable to held to maturity investment, these securities are usually reported at their amortized cost whether discount or premium.

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