Question

Problem #3 Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $275 million of 9% bonds, dated January 1, on January 1, 2018. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 6%. The terms of the bonds is 10 years. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2018, was $300 million. Required:

1. Calculate the purchase price of the bonds.

2. Using the purchase price of the bond calculated in #1, prepare an amortization schedule for this bond.

3. Prepare the journal entries for:

a. January 1,2018

b. June 30, 2018

c. December 30, 2018

Answer 1

Solution 1:

Computation of Bond Purchase Price
Table values are based on:
n=	20
i=	3.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.5537	$275,000,000.00	$152,260,832
Interest (Annuity)	14.8775	$12,375,000.00	$184,108,751
Price of bonds			$336,369,584

Solution 2:

Bond Amortization Schedule
Period	Cash received	Interest revenue	Premium Amortized	Carrying value
0				$336,369,584
1	$12,375,000	$10,091,088	$2,283,912	$334,085,671
2	$12,375,000	$10,022,570	$2,352,430	$331,733,241
3	$12,375,000	$9,951,997	$2,423,003	$329,310,239
4	$12,375,000	$9,879,307	$2,495,693	$326,814,546
5	$12,375,000	$9,804,436	$2,570,564	$324,243,982
6	$12,375,000	$9,727,319	$2,647,681	$321,596,302
7	$12,375,000	$9,647,889	$2,727,111	$318,869,191
8	$12,375,000	$9,566,076	$2,808,924	$316,060,266
9	$12,375,000	$9,481,808	$2,893,192	$313,167,074
10	$12,375,000	$9,395,012	$2,979,988	$310,187,087
11	$12,375,000	$9,305,613	$3,069,387	$307,117,699
12	$12,375,000	$9,213,531	$3,161,469	$303,956,230
13	$12,375,000	$9,118,687	$3,256,313	$300,699,917
14	$12,375,000	$9,020,998	$3,354,002	$297,345,915
15	$12,375,000	$8,920,377	$3,454,623	$293,891,292
16	$12,375,000	$8,816,739	$3,558,261	$290,333,031
17	$12,375,000	$8,709,991	$3,665,009	$286,668,022
18	$12,375,000	$8,600,041	$3,774,959	$282,893,062
19	$12,375,000	$8,486,792	$3,888,208	$279,004,854
20	$12,375,000	$8,370,146	$4,004,854	$275,000,000

Solution 3:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit	Credit
1	1-Jan-18	Investment in Bond Dr	$275,000,000.00
		Premium on bond investment Dr	$61,369,584.00
		To Cash		$336,369,584.00
		(Being investment in bond recorded)
2	30-Jun-18	Cash Dr	$12,375,000.00
		To Interest revenue		$10,091,088.00
		To Premium on bond investment		$2,283,912.00
		(Being revenue recognition for bond interest and premium amortized)
3	31-Dec-18	Cash Dr	$12,375,000.00
		To Interest revenue		$10,022,570.00
		To Premium on bond investment		$2,352,430.00
		(Being revenue recognition for bond interest and premium amortized)