Answer:
investment on bonds 200 millions
premium on bonds 40 millions
cash 240 millions
to record the purchase of bonds
cash 7 millions
interest revenue 6 millions
premium on bonds 1 million
interest proceeds of december 31th
Balance sheet:
bonds 200
premium 39
net 239
cash 250 millions
investment on bonds 200 millions
premium on bonds 39 millions
gain on sale of invesment 11 millions
to record the sale of bonds
Explanation:
<u>recording the bonds:</u>
acquisition 240
bonds face value (200)
premium 40
It is a premium, as the bonds where purchased at higher price than face value
<u>Interest at December 31th</u>
To calculate the interest, we will calcualte the interest per payment:
7% annual coupon rate /2 payment per year = 3.5% semi-annual rate
5% market rate /2 payment per year = 2.5% semi-annual market rate
cash proceeds: 200 x 3.5% = 7
interest revenue:
carrying value x market rate
240 x 2.5% = 6
amortization 7 - 6 = 1
<u>Value in the balance sheet:</u>
the net value of the bond will be the face value plus the carrying value of the premium
<u>Sale of the bonds:</u>
selling price 250
carrying value of the bonds (239)
gain on sale of bonds 1 1
It is a gain, as the bonds are being sold at a higher price than his carrying value.
