Question

On January 1, 2021, Tiger Corporation acquired as long-term investment $1,000,000 of 8% bonds, dated January 1. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 10% for bonds of similar risk and maturity. Tiger paid $875,378 for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was $885,000. At what amount will Tiger report its investment in the December 31, 2021, balance sheet?

Answer 1

Answer:

the bonds will be reported at net:              882,727.36

Explanation:

face value 1,000,000

purchase     875, 378

discount       124, 622

we use the effective market rate method:

June 30th

effective rate per payment: 10% / 2 = 5% as there are two payment per year

and the

interest revenue 875,378 x 5% = 43.768,9‬

cash procces: 1,000,000 x 4% = 40,000

amortization:  3,768.9

December 31th

carrying value:     875, 378 - 3,768.9 = 871,609.1

interest revenue: 871,609.1 x 5% =         43.580,455

cash procces:   1,000,000 x 4% =           40,000

amortization                                               3,580.46

Carrying value at December 31th

discount 124, 622 - 3,768.9 - 3,580.46 = 117.272,64

face value 1,000,000

discount         117.272,64

net:              882,727.36