Question

60 points Rainbow Company issued 6% bonds, dated January 1, with a face amount of $800,000 on January 1, 2021. The bonds sold for $661,665 and mature in 2035 (15 years). For bonds of similar risk and maturity the market yield was 8%. Interest is paid semiannually on June 30 and December 31. Assume Rainbow determines interest at the effective rate. Fiscal year ends on December 31. Answer the following questions 1. What is the amount related to the bonds that Rainbow will report in its balance sheet at December 31, 2021? 2. What is the amount related to the bonds that Rainbow will report in its income statement for the year ended December 31, 2021? (Ignore income taxes.) 3. What is the amount related to the bonds that Rainbow will report in its statement of cash flows for the year ended December 31, 2021? Indicate the category in which to classify cash flows, activities activities 4. Assume the entire bond issue was purchased by Moore Company Moore is holding the bonds in its trading portfolio The fair value of the bonds on December 31, 2021 is $675,077 a. At what amount will Moore report this investment in the December 31, 2021 balance sheet? b. What is the amount related to the bond investment that Moore will report in its income statement for the year ended December 31, 2021? (Ignore income taxes.) c. What is the amount related to the bond investment that Moore will report in its statement of cash flows for the year ended December 31, 2021? Indicate the category in which to classify cash flows activities activities

Answer 1

	Effective interest	Interest paid	Amortization of discount	Balance
				$      661,665
Jun-21	$            26,467	$         24,000	$         2,467	$      664,132
Dec-21	$            26,565	$         24,000	$         2,565	$      666,697

In the books of Rainbow,

1. Amount to be shown in B/S (Liability) = Bond at face value - Unamortized discount = $800,000 - $133,303 = $666,697

2. Amount to be shown in I/S = Interest expense + Amortization of Discount = $24,000 + $24,000 + $2,467 + $2,565 = $53,032

3. Amount to be shown in statement of Cash flow

• Proceeds of Bonds = $661,665 = Cash flow from financing activity (Inflow)
• Interest paid on bonds = $24,000 + $24,000 = $48,000 = Cash flow from operating activities (If US GAAP, Under IFRS it will be shown under operating/financing activity)

For Moorey company,

1. Investment in HFT securities will be revalued to = $675,077

2. Amount to be shown under income statement = Interest income

= $26,467 + $ 26565 = $53,032

3. Amount to be shown under statement of cash flow
Investmentment in HFT securities = $661,665 under Investing activities.
Interest received = $24,000 + $24,000 = $48,000 (under operating activities if US GAAP , If IFRS will be shown under Operating/ Investing activity )

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