Here's the question:
On January 1, 2016, Ithaca Corp. purchases Cortland Inc. bonds that have a face value of $330,000. The Cortland bonds have a stated interest rate of 5%. Interest is paid semiannually on June 30 and December 31, and the bonds mature in 10 years. For bonds of similar risk and maturity, the market yield on particular dates is as follows
1) Calculate the price Ithaca would have paid for the Cortland bonds on January 1, 2016 (ignoring brokerage fees).
I got $211,692 for the bond fair value.
2) Prepare all appropriate journal entries related to the bond investment during 2016, assuming Ithaca accounts for the bonds as a held-to-maturity investment. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds.
My work:
Jan 1, 2016: debit investment in bonds 330,000
credit discount - 118,308
credit cash - 211,692
June 30, 2016: debit cash - 8,250
debit discount - 3,393
credit interest revenue - 11,643
june 30, 2016 no JE required
Dec 31, 2016 - First conflict
debit - cash 8,250
debit discount - 3,206
credit interest revenue - 11,456
(330,000 - 118,308 - 3,393) x 11% / 2
Discount and interest are wrong for what reason?
2nd problem:
Prepare all appropriate journal entries related to the bond investment during 2016, assuming that Ithaca chose the fair value option when the bonds were purchased, and that Ithaca determines fair value of the bonds semiannually. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds.
Jan 1, 2016: debit investment in bonds 330,000
credit discount - 118,308
credit cash - 211,692
June 30, 2016: debit cash - 8,250
debit discount - 3,393
credit interest revenue - 11,643
June 30, 2016: DR Net unrealized holding gains and losses - I/S - 1,773
CR Fair value adjustment - 1,773
This is wrong for what reason? My calculation:
n = 19, i = 6%
interest: (350,000 x 5%) / 2 x PVA of 11.15812
principal: 350,000 x PV of 0.33051
total: 213,312
I took the initial cost of 211,692 and subtracted it from the june 30 amortization cost, 3,393
to receive 215,085
To receive the FVAdj I did
215,085 - 213,312 = 1,773
Wrong.
??
Dec 31, 2016 - DR Cash - 8,250
Dr discount - 3,206 - WRONG
Cr interest revenue - 11,456 - WRONG
Dec 31, 2016
DR Net unrealized gains and losses- I/S - 24,950
CR FVAdj - 24,950
Both wrong again.
Work:
interest: 88,017 + principal of 103,551 = 191,568
n = 18, i = 7%
June 30 amortized cost = 215,085
+ dec 31, 2016 discount = 3,206
= 218,291 amortized cost for dec 31
Thus,
218,291 - 191,568 = 26,723
subtract the current FVadj =
1,773 =
24,950
What am I doing wrong? Thanks.
On January 1, 2016, Ithaca Corp. purchases Cortland Inc. bonds that have a face value of $330,000. The Cortland bonds have a stated interest rate of 5%. Interest is paid semiannually on June 30 and December 31, and the bonds mature in 10 years. For bonds of similar risk and maturity, the market yield on particular dates is as follows
January 1, 2016 | 11.0 | % |
| June 30, 2016 | 12.0 | % |
| December 31, 2016 | 14.0 | % |
1) Calculate the price Ithaca would have paid for the Cortland bonds on January 1, 2016 (ignoring brokerage fees).
I got $211,692 for the bond fair value.
2) Prepare all appropriate journal entries related to the bond investment during 2016, assuming Ithaca accounts for the bonds as a held-to-maturity investment. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds.
My work:
Jan 1, 2016: debit investment in bonds 330,000
credit discount - 118,308
credit cash - 211,692
June 30, 2016: debit cash - 8,250
debit discount - 3,393
credit interest revenue - 11,643
june 30, 2016 no JE required
Dec 31, 2016 - First conflict
debit - cash 8,250
debit discount - 3,206
credit interest revenue - 11,456
(330,000 - 118,308 - 3,393) x 11% / 2
Discount and interest are wrong for what reason?
2nd problem:
Prepare all appropriate journal entries related to the bond investment during 2016, assuming that Ithaca chose the fair value option when the bonds were purchased, and that Ithaca determines fair value of the bonds semiannually. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds.
Jan 1, 2016: debit investment in bonds 330,000
credit discount - 118,308
credit cash - 211,692
June 30, 2016: debit cash - 8,250
debit discount - 3,393
credit interest revenue - 11,643
June 30, 2016: DR Net unrealized holding gains and losses - I/S - 1,773
CR Fair value adjustment - 1,773
This is wrong for what reason? My calculation:
n = 19, i = 6%
interest: (350,000 x 5%) / 2 x PVA of 11.15812
principal: 350,000 x PV of 0.33051
total: 213,312
I took the initial cost of 211,692 and subtracted it from the june 30 amortization cost, 3,393
to receive 215,085
To receive the FVAdj I did
215,085 - 213,312 = 1,773
Wrong.
??
Dec 31, 2016 - DR Cash - 8,250
Dr discount - 3,206 - WRONG
Cr interest revenue - 11,456 - WRONG
Dec 31, 2016
DR Net unrealized gains and losses- I/S - 24,950
CR FVAdj - 24,950
Both wrong again.
Work:
interest: 88,017 + principal of 103,551 = 191,568
n = 18, i = 7%
June 30 amortized cost = 215,085
+ dec 31, 2016 discount = 3,206
= 218,291 amortized cost for dec 31
Thus,
218,291 - 191,568 = 26,723
subtract the current FVadj =
1,773 =
24,950
What am I doing wrong? Thanks.