Question

On May 1, 2007, Computervision purchased $156,000, 8% bonds, with interest payable on January 1 and July 1, for $90,234, NOT INCLUDING accrued interest. The bonds mature on April 1, 2015. Amortization is recorded using the straight-line method and the bonds are classified as trading. On December 31, 2010, the bonds were adjusted to their proper carrying value when their fair value was $108,685. The fair market value of the bonds on December 31, 2009 was $120,561. The fair market value of the bonds on December 31, 2009 was $120,561.

At what amount will these securities be carried on the balance sheet as of December 31, 2010?

Answer 1

The bonds are classified as trading securities. Then as per the valuation of principle of trading securities , the carrying amount of such bonds shall be the book value or the fair market value whichever is lower on the date of balance sheet.

Based on the above principle, the fair market value of the bonds on December 31, 2010 is $108,685 which is less than carrying amount of bond as on December 31,2010.

Therefore, the amount will these securities be carried on the balance sheet as of December 31, 2010 is $ 108,685.

working Note;

	$
Face value of 8%, Bond	156,000.00
Purchase price	90,234.00
Discount to be amortized over the life of 8 years ( $ 156,000 -$ 90,234)	65,766.00
Annual amortization of discount ( $65,766/ 8 years)	8,220.75
Book Value as on December 31, 2007                          {$ 90,234 + ($8,220.75/12 months) x 8 months}	95,714.50
Book Value as on December 31, 2008                          {$ 95,714.50 + $8,220.75}	103,935.25
Book Value as on December 31, 2009                          {$ 103,935.25 + $8,220.75}	112,156.00
Book Value as on December 31, 2010                          {$ 112,156 + $8,220.75}	120,376.75