USE THE FOLLOWING INFORMATION FOR #3 - 6: Par Value of Bonds Purchased $ 175,000
ID: 2425917 • Letter: U
Question
USE THE FOLLOWING INFORMATION FOR #3 - 6:
Par Value of Bonds Purchased $ 175,000
Stated Interest Rate 8%
Effective Interest Rate 10%
Purchased On 1/1/20X2
Interest Paid Semi-Annual
Interest for 1/1 - 6/30 paid on July 1st of current year
Interest for 7/1 - 12/31 paid on January 1st of next year
Years to maturity 5
- The bonds were purchased with the positive intent and ability to hold to maturity.
- The investor corporation has not elected the fair value option of reporting.
- Use the effective interest method 3.) What is the value of the bond at the original date of purchase?
A. $ 215,536
B. zero
C. $ 175,000
D. $ 161,484
4. Assuming that the fair value option is NOT elected on this bond what is the impact on net income for the journal entry required at each interest payment/accrual date?
A. Increase
B. Decreases
C. No impact
D. Not able to determine
CONSIDER THESE ADDITIONAL FACTS RELATED TO #5 & 6:
Bonds Called on 7/1/X6
Call % 103%
5. What is the gain or loss on these bonds at the date of call? Indicate amount and whether it is a gain or loss.
6.) At the original date of purchase the amount of interest expected to be earned by the purchasing company approximates what %?
A. 8%
B. 10%
C. 5%
D. 4%
Explanation / Answer
3)
Interest paid = semi annually, therefore
Interest = 175000* 8%*1/2 = 7000
Discounting rate = 10% *1/2 = 5%
Time period = 5 year *2 = 10 year
Value of the bond at the original date of purchase = interest * cumulative present value factor + face value * present value factor
= 7000* 7.7217 + 175000 * 0.6139
= 161484
ANSWER = D) 161484
4) Fair value option is NOT elected on this bond, the impact on net income for the journal entry required at each interest payment/accrual date= A. Increase
5) It is gain of 175000*103% - 175000 = 5250
6) 10%
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