Question

On January 1, 2020, Baker Corp. purchased $70,000 of Chocolate Inc. bonds. These bonds pay 5% interest annually on December 31 and mature December 31, 2029. The investment is classified as a held-to-maturity investment because Baker has the intent and the ability to hold the bonds for 10 years. The effective rate on the bonds is 4.5%.
1. Prepare the journal entry for the purchase of the investment on January 1, 2020.
2. Prepare the journal entries to record interest received on December 31, 2020, and December 31, 2021.
3. Indicate the carrying value of the Chocolate bonds on Baker's December 31, 2021, balance sheet assuming that the fair value of the bonds on December 31, 2021, was $20,800.
• Note: List multiple debits or credits (when applicable) in alphabetical order.

Answer 1

Answer:

January 1, 2020

Dr Investment in Chocolate Inc. bonds 70,000

Dr Discount on investment in bonds 2,769.46

    Cr Cash 72,769.46

December 31, 2020

Dr Cash 3,500

    Cr Interest revenue 3,274.63

    Cr Discount on investment in bonds 225.37

December 31, 2020

Dr Cash 3,500

    Cr Interest revenue 3,284.77

    Cr Discount on investment in bonds 215.23

carrying value on December 2021 = $73,210.06

Explanation:

the market price of the bonds:

PV of face value = $70,000 / (1 + 4.5%)¹⁰ = $45,074.94

PV of coupon payments = $3,500 x 7.91272 (PVIFA, 4.5%, 10 periods) = $27,694.52

market price = $72,769.46

discount amortization = ($72,769.46 x 4.5%) - $3,500 = $225.37

discount amortization = ($72,994.83 x 4.5%) - $3,500 = $215.23