Question

On 1 January 20X4, Queen Company purchased $5,400,000 of Sport Corp. 6% bonds, classified as an FVOCI-Bonds investment. The bonds pay semi-annual interest each 30 June and 31 December. The market interest rate was 4% on the date of purchase. The bonds mature on 31 December 20X8.

(PV of $1, PVA of $1, and PVAD of $1.) (Use appropriate factor(s) from the tables provided.)

Required:

1. Calculate the price paid by Queen Company. (Round time value factor to 5 decimal places. Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollar amount.)

2. Construct a table that shows interest revenue reported by Queen, and the carrying value of the investment, for the first two interest periods. Use the effective-interest method. (Round your answers to the nearest whole dollar amount.)

3. Queen has a June 30 year-end. On June 30, 20X4, the fair value of the investment was $5,680,000. Prepare the journal entries required on June 30 related to this investment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest whole dollar amount.)

4. Prepare the journal entry for the second payment of interest received on December 31, 20X4. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest whole dollar amount.)

Answer 1

Half Yearly Interest - reduce interest rate to half and double the period.
1) Price paid = Half year interest * PVIFA(2%,10) + Par value * PVIF(2%,10%)
(5400000*3%) * PVIFA(2%,10) + 5400000 * PVIF(2%,10%)
(5400000*3%) * 8.9826 + 5400000 * 0.8203 = $5884901
2) Amortisation table :
Date	Interest recd.	Interest revenue	Premium amortised	Carrying Value
Jan 1 20X4			(carrying value *2%)	5884901
Jun 30 20X4	162000	117698	44302	5840599
Dec 31 20X4	162000	116812	45188	5795411
3) journal entries:
Date	Acc Title	Debit $	Credit $
Jun 30 20X4	Cash	162000
	Premium on Bond receivable		44302
	Interest Revenue		117698
	(being interest received and interest revenue recorded)
Jun 30 20X4	Unrealised Loss	160599		(5840599-5680000)
	Bond Receivable		160599
	(adjustment of fair value to $5680000)
4)
Date	Acc Title	Debit $	Credit $
Dec 31 20X4	Cash	162000
	Premium on Bond receivable		45188
	Interest Revenue		116812
	(being interest received and interest revenue recorded)