Question

Troomp Corporation acquired $7,200,000 par value, 14%, five-year bonds on their date of issue, January 1 of the current year. The market rate at the time of issue was 18% and interest is paid semiannually on June 30 and December 31 Troomp will use the effective interest rate method to account for this investment. Troomp intends to hold the investment until the bonds mature. Read the requirements. Requirements 1 Determine the purchase price of the investment in bonds. Prepare the journal entry to record the acquisition of the bond investment. Prepare an amortization table for the investment using the effective interest rate method Prepare the journal entry to record the interest income for the first year. Prepare the journal entry to record the sale of the bonds at the end of the third year for $6,620,000. a. b. c. d. e.

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Answer #1
Part -(a) Purchase price of the Bonds
Year Cash flows Present value @ 9% (18%/2) Present value
                    1                   504,000                                           0.9174312                                                462,385
                    2                   504,000                                           0.8416800                                                424,207
                    3                   504,000                                           0.7721835                                                389,180
                    4                   504,000                                           0.7084252                                                357,046
                    5                   504,000                                           0.6499314                                                327,565
                    6                   504,000                                           0.5962673                                                300,519
                    7                   504,000                                           0.5470342                                                275,705
                    8                   504,000                                           0.5018663                                                252,941
                    9                   504,000                                           0.4604278                                                232,056
                 10                   504,000                                           0.4224108                                                212,895
                 10                7,200,000                                           0.4224108                                            3,041,358
Purchase price of the Bonds                                            6,275,857
Premium on Bonds = (7,200,000-6,275,857) = 924,143
Part - (b) Journal entry on acquisition of Bonds
1/1 Investment in Bonds                                            7,200,000
Cash                       6,275,857
Premium on Investment in Bonds                          924,143
(Bond acquired)
Part - (c) Amortization table
Date Cash Income Amortization Carrying amount
(7,200,000*7%) (Carrying amount * 9%) (Expense-Cash)
1/1                       6,275,857
6/30                   504,000                                         564,827.16                                                  60,827                       6,336,684
12/31                   504,000                                         570,301.60                                                  66,302                       6,402,986
6/30                   504,000                                         576,268.74                                                  72,269                       6,475,255
12/31                   504,000                                         582,772.93                                                  78,773                       6,554,028
6/30                   504,000                                         589,862.50                                                  85,862                       6,639,890
12/31                   504,000                                         597,590.12                                                  93,590                       6,733,480
6/30                   504,000                                         606,013.23                                                102,013                       6,835,494
12/31                   504,000                                         615,194.42                                                111,194                       6,946,688
6/30                   504,000                                         625,201.92                                                121,202                       7,067,890
12/31                   504,000                                         636,110.09                                                132,110                       7,200,000
   
Part - (d) Journal entry of interest income for 1st year
6/30 Cash                                                504,000
Premium on Bonds payable                                                  60,827
Interest received                          564,827
(Interest received and premium amortized)
12/31 Cash                                                504,000
Premium on Bonds payable                                                  66,302
Interest received                          570,302
(Interest received and premium amortized)
Part - (e) Cash                                            6,620,000
Loss on Investment in Bonds                                                113,480
Investment in Bonds                       6,733,480
(Bond sold)
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