On January 1, 2014, Corporation A purchases bonds in Corporation B. The bonds have a par...
On January 1, 2014, Corporation A purchases bonds in Corporation B. The bonds have a par value of $50,000 and a stated interest rate of 6%, with annual interest payments on December 31 and a maturity date of December 31, 2023. Corporation A purchases the bonds for $43,290 to yield 8% interest, and holds the bonds in its trading account. On December 31, 2014, the fair value of the bonds is $45,000. When the bond market opens on January 2, 2015, Corporation B sells the bonds for an amount intended to achieve a 7% yield for Corporation A. Disregarding accrued interest, what gain (rounded to whole dollars) should Corporation A recognize on the bonds in 2015?
Homework Answers
Answer:
Since Corporation A holds the bonds in its trading account. Hence these bonds would be reported December 31, 2014 at fair value of $45,000. Unrealized holding gains are recognized in earnings of 2014.
On January 2, 2015, Corporation B sells the bonds for an amount intended to achieve a 7% yield.
Annual interest payment = $50,000 * 6% = $3,000
Maturity date = December 31, 2023.
Time to maturity = 9 years
To get sale price, we will use PV function of excel:
PV (rate, nper, pmt, fv, type)
PV (7%, 9, -3000, -50000, 0)
= $46,742.38
As such sale value = $46,742.38
Disregarding accrued interest, gain (rounded to whole dollars) Corporation A should recognize on the bonds in 2015 = Sales value - Fair value as reported as on December 31, 2014
= $46,742.38 - $45,000
= $1,742
Disregarding accrued interest, gain (rounded to whole dollars) Corporation A should recognize on the bonds in 2015 = $1,742
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