On 1/1/2015 ABC Corp buys the entire bond issue from XYZ Corp. The bonds have a
ID: 2553246 • Letter: O
Question
On 1/1/2015 ABC Corp buys the entire bond issue from XYZ Corp. The bonds have a $1,000,000 face value, a stated interest rate of 5% (paid annually on December 31), and a 5-year term to maturity. The market rate of interest at the date of issuance was 8% On 4/1/2017 ABC Corp sells the entire bond investment for $900,000 plus accrued interest Assume that ABC Corp accounts for the bond investment as a trading investment, what is the gain/loss on sale that ABC Corp reports in the journal entry to record the sale of the bond [if you think ABC Corp records a loss of XXXX, write-XXXX]?Explanation / Answer
Ans. Working Note:-
Date of sale 4/1/2017
Last date of interest payment 12/31/2016
Accured Interest for the period of 4month
Amt of Accured Interest = 1000000X5%X4/12 = 16667
Calculation of cost of bond
Market rate of interest at the time of buying the bond = 8%
ROI 5%, annual interest (1000000X5%) = 50000
Market value of bond = 50000XCPV5yrs@8%+1000000XPV at yr 5 @8%
= 50000X3.9927+1000000X.681 = $880614
Sale value of bond is $900000
Profit on sale of bond = (900000-880614) = $19386
Net proceeds on sale (including Accured interest = 900000+16667 = $916667
Journal Entry at the time of sale bond in the books of ABC
4/1/2017 Cash/bank A/c Dr 916667
To Investment in Xyz Bond A/c 880614
To Accured Interest A/c 16667
To P&L (profit on sale) A/c 19386
(Being Recording the Transaction of sale of XYZ bond)
Accured Interest A/c Dr. 16667
To P&L A/c 16667
(Accured Interest Transferred in the Profit and loss ac)
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