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On 1 January 2005, Franco Ltd. purchased $590,000 of Gentron Company 7.00% bonds. The bonds pay...

On 1 January 2005, Franco Ltd. purchased $590,000 of Gentron Company 7.00% bonds. The bonds pay semi-annual interest each 30 June and 31 December. The market interest rate was 8% on the date of purchase. The bonds mature on 31 December 2010.

Required:
1. Calculate the price paid by Franco Ltd. (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. Assume that the bond is classified as an AC investment. Construct a table that shows interest revenue reported by Franco, and the carrying value of the investment, for four interest periods. Use the effective-interest method. (Round your answers to the nearest whole dollar amount.)

Period Cash Payment Interest Revenue Amortization Bond Carrying Value
0
1
2
3
4

3. Prepare the entries for the first four interest periods based on your calculations in requirement 2. (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.)

1. Record the first period revenue. 30th june 2005

2. Record the second period revenue. 31Dec 2005

3. Record the third period revenue. 30 June 2006

4. Record the fourth period revenue.    31 Dec 2006

4. Assume instead that the bond is classified as a FVTPL investment, and the fair value at the end of 2005 was $575,000, and was $585,500 at the end of 2006. Prepare the entries for each interest period in 2005 and 2006, and adjust the bond to fair value at the end of each fiscal year. (That is, the bond is not adjusted to fair value at each interest payment date, just at the reporting date.) (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.)

1. Record the first period revenue.    30 June 2005

2. Record the second period revenue. 31 Dec 2005

3. Record the holding gain/loss on investment for the year ended 2005. 31 Dec 2005

4. Record the third period revenue 30 June 2006

5. Record the fourth period revenue. 31 Dec 2006

6. Record the holding gain/loss on investment for the year ended 2006. 31 Dec 2006

5. Show how the bond would be presented on the statement of financial position at the end of 2005 and 2006, if it were (a) AC and (b) FVTPL. (Round your answers to the nearest whole dollar amount.)

2006 2005
(a) AC investment
Investment in Gentron bond
(b) FVTPL investment
Investment in Gentron bond

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Amortised Costs Computation of Present value of bond purchased Bond Rate Market rate Face Value or Maturity Value Market Value 7%) Semiannual 8%) Semiannual 590,000 562,550 6 Semiannual 12 Discount 27,450 1. Calculate the price paid by Franco Ltd The PV of the Bond-PV of Interests+PV of Bond Maturity Value PV of Interest Rate FV Interest Payment-Cou Annuity Factor-(1-(1+r)A-N)/r r-Market Rate 9.385 The Present Value of Interest 193,800 PV of Bond Maturity Value-Face Value PV factor forN Face Value or Maturity Value PV factor-1/(1+r)AN 590,000 0.625 Present Value 368,750 Present Value of Bond 562,550 2. Assume that the bond is classified as an AC investment Amortisation Schedule for Discount on Bonds Interest Incone (Market rate previous book value in G) Amortisation Credit Balance in in bond Debit balance Interest Receipt (Coupon Effective Interest of Bond Discount [C-B] Bond Discount receivable Rate rate method Account account Book Value of Bond 1-Jan-05 30-Jun-05 31-Dec-05 30-Jun-06 31-Dec-06 30-Jun-07 31-Dec-07 30-Jun-08 31-Dec-08 30-Jun-09 31-Dec-09 590,000 590,000 590,000 90,000 590,000 90,000 590,000 590,000 590,000 590,000 90,000 590,000 90,000 562,550 564,402 566,328 568,331 570,414 572,581 574,834 577,178 579,615 582,149 584,785 587,527 590,000 1,852 22,576 22,733 22,817 22,903 2,083 2,167 2,253 23,672 21,669 19,586 17,419 15,166 23,087 23,185 23,286 23,391 23,123 275,250 2,437 10,385 7,851 2,741 2,473 27,450 31-Dec-10 0 247,800

Journal Ent General Journal Date 1-Jan-05 Debit Credit Investment in Bonds Discount on Bonds Cash (The bonds will be reported on balance sheet at face value minus Discount on bonds) 590,000 27,450 562,550 1. Record the first period revenue. 30th june 2005 Date General Journal Debit Credit Cash Discount on Bonds Interest Revenue Interest income is recognized 30-Jun-05 20,650 1,852 22,502 2. Record the second revenue. 31Dec 2005 Date General Journal Debit Credit Cash Discount on Bonds Interest Revenue 31-Dec-05 20,650 1,926 22,576 3. Record the third period revenue. 30 June 2006 30-Jun-06 Cash Discount on Bonds Interest Revenue 20,650 2,003 22,653 Record the fourth period revenue. 31 Dec 2006 Cash Discount on Bonds Interest Revenue 20,650 2,083 22,733

FVTPL Changes in Fair value : An increase is debited while a decrease is credited in securities account. Unrealized gain or loss are recorded recognized in Income Statement General Journal Debit Credit 1-Jan-05 Investment in Bonds Cash 562,550 562,550 1. Record the first period revenue. 30 June 2005 General Journal Debit Credit 30-Jun-05 Cash Investment Revenue 20,650 20,650 2. Record the second period revenue. 31 Dec 2005 31-Dec-05 Cash Investment Revenue 20,650 20,650 3. Record the holding gain/loss on investment for the year ended 2005. 31 Dec 2005 Carrying value as at 31 Dec 2005 Fair Value 562,550 575,000 Investment in Bonds Unrealized holding gain/loss -Income Statement 12,450 12,450 4. Record the third period revenue 30 June 2006 Cash Investment Revenue 20,650 20,650 5. Record the fourth period revenue. 31 Dec 2006 Cash Investment Revenue 20,650 20,650 6. Record the holding gain/loss on investment for the year ended 2006. 31 Dec 2006 Carrying value as at 31 Dec 2006 Fair Value 575,000 585,500 Investment in Bonds 10,500 Unrealized holding gain/loss -Income Statement 10,500 5. Show how the bond would be presented on the statement of financial position at the end of 2005 and 2006, if it were (a) AC and (b) FVTPL 2006 2005 AC investment Investment in Gentron bond FVTPL investment Investment in Gentron bond 570,414 566,328 Book Value of Bond 585,500 575,000 Fair Value

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