Question

Miller Company issued 8% bonds, dated January 1, with a face amount of $1,000,000 on January 1, 2021. The bonds sold for $846,278 and mature in 2035 (15 years). For bonds of similar risk and maturity the market yield was 10%. Interest is paid semiannually on June 30 and December 31. Assume Miller 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 Miller will report in its balance sheet at December 31, 2021? 2. What is the amount related to the bonds that Miller 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 Miller will report in s statement of cash flows for the year ended December 31, 2021? Indicate the category in which to classify cash flows. activities activities For Blank 5 4. Assume the entire bond issue was purchased by Gama Company. Gama is holding the bonds in its belonk portfolio. The fair value of the bonds on December 31, 2021 is $859,077. a. At what amount will Gama report this investment in the December 31, 2021 balance sheet? b. What is the amount related to the bond investment that Gamo will report in its income statement for the year ended December 31, 2021? (Ignore income taxes.) What is the amount related to the bond investment that Gama 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 (Do not add dollar sign: do not add comma by yourself to your amount round the answer to the whole number, use minus sign if the amount is negative)

Answer 1

Coupon rate per period (8%/2)	4.00%
Face value of bond	$         1,000,000
Market rate per period (10%/2)	5.00%
Interest paid (1000000*4%)	$               40,000
Interest paid on	Semi annually
Number of period (15*2)	30

Issue price of bonds (Total of above)	$             846,278
Less: face value of Bond	$         1,000,000
Discount on Bond payable	$             153,722

Interest payment (Credit Cash) = Face value of bond * Coupon rate

Interest Expense (Debit Interest Expense) = Carrying value of bond for previous period * Market or Discounting rate

Amortization of bond Discount (Credit Bond Discount) = Interest Expense - Interest payment

Debit Balance in Bond Discount = Debit Balance in Bond Discount for previous period - Amortization of bond Discount

Credit Balance in Bond Payable = Face value of bond

Carrying value of bond = Credit Balance in Bond Payable - Debit Balance in Bond Discount

Bond Discount Amortization Table
Period	Date	Interest payment	Interest Expense	Amortization of bond Discount	Debit Balance in Bond Discount	Credit Balance in Bond Payable	Carrying value of bond
0	Jan 1, 2021				153,722	1,000,000	846,278
1	Jun 30, 2021	40,000	42,314	2,314	151,408	1,000,000	848,592
2	Dec 31, 2021	40,000	42,430	2,430	148,978	1,000,000	851,022
Total		80,000	84,744				851,022

Part 1

Answer 1	Amount reported on bonds at Balance sheet 2021	851,022
Answer 2	Interest expense recorded in the income statement	84,744
Answer 3	Cash received by issuing the bonds (Financing activities - Cash inflows)	846,278
	Cash payment for interest (Operating activities - Cash outflows)	(80,000)

Part 2

Answer 4	Amount of trading investment (reported at fair value)	859,077
Answer 5	Interest revenue received	80,000
	Unraelised gain on trading investments (859077-846278)	12,799
	Amount reported on the income statement	92,799
Answer 6	Cash payment for acquired trading investments (investing activities - Cash outflows)	(846,278)
	Cash receipts for interest revenue (operating revenue - Cash inflows)	80,000