Question

\On January 1, year 4, Purl Corp. purchased, as a long‐term investment, $500,000 face value Shaw, Inc. 8% bonds for $456,200. The bonds were purchased to yield 10% interest. Purl has the positive intent and ability to hold the bonds until maturity on January 1, year 10. The bonds pay interest annually on January 1, and Purl uses the interest method of amortization. What amount (rounded to nearest $100) should Purl report on its December 31, year 5, balance sheet for this long‐term investment?

Answer 1

Explanation:

An investment kept to maturity (HTM) purchased at a discount will increase its valuation as maturity comes, which ensures that the book value of the investment should be the fair market value of the investment. The lender bears and reports the expenditure at amortized costs throughout the duration of an HTM fund.

The interest and amortization entries for the two years 2014 and 2015 that lead to the correct ending balance at December 31, 2015, are:

December 31, 2014:

DR: Interest receivable .08($500,000) 40,000

DR: Discount on HTM bonds 5,620

CR: Interest revenue .10($456,200) 45,620

December 31, 2015:

DR: Interest receivable .08($500,000) 40,000

DR: Discount on HTM bonds 6,182

CR: Interest revenue .10($456,200 + $5,620) 46,182

Thus, the ending net investment balance at December 31, 2015, is $456,200 + $5,620 + $6,182 = $468,002, or $468,000 (rounded to the nearest $100 as required by the problem).