Question

On January 1, Year 1, 50 bonds, each valued at $1,000, 8% stated rate, were purchased from Company B. These bonds are expected to mature on December 31, Year 3, paying interest annually on December 31st. Bonds were purchased to yield 5%. Please classify these bonds as held-to-maturity securities. Let me know if you have any questions. Using the information provided in the exhibits, enter the appropriate amounts in the designated cells below. Enter all amounts as positive values. Round all amounts to the nearest dollar. If no entry is necessary, enter a zero (0).

Items Amount

1) The amount Company A paid for the bonds.

2) The amount of premium on the bonds on January 1, Year 1.

3) The amount of cash interest received by Company A during Year 1.

4) The amount of interest revenue recognized in the Year 1 income statement.

5) The amount of bond premium amortized in Year 1.

6) The carrying amount of the bonds presented in the December 31, Year 1, financial statements.

Answer 1

Solution 1:

Table values are based on:
n=	3
i=	5.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.86384	$50,000.00	$43,192
Interest (Annuity)	2.72325	$4,000.00	$10,893
Price of bonds			$54,085

Solution 2:

amount of premium on the bonds on January 1, Year 1. = $54,085 - $50,000 = $4,085

Solution 3:

amount of cash interest received by Company A during Year 1 = $4,000

Solution 4:

Amount of interest revenue recognized in the Year 1 income statement. = $54,085 * 5% = $2,704

Solution 5:

Amount of bond premium amortized in Year 1 = $4,000 - $2,704 = $1,296

Solution 6:

carrying amount of the bonds presented in the December 31, Year 1, financial statements = $54,085 - $1,296 = $52,789