Question

On January 1, 2019. Luke Corporation purchased 6 year, 7% bonds of Reed Inc., and classified the purchase as an amortized cost investment, using the effective interest method. The bonds pay interest semi-annually. Other information pertaining to the investment follows: L on Jany & July 1 of each to Face value 65,000 Current market rate 8% Required: a) Determine the amount of cash paid for the bond. b) Prepare a bond amortization schedule, rounding to 2 decimal places. c) Assuming that Luke Corporation applies IFRS, prepare all required journal entries for the investment, for the fiscal years ending December 31, 2019 and December 31, 2020. d) Assuming that Luke Corporation applies ASPE, and has chosen the straight-line method of amortizing any bond premium or discount, prepare the same journal entries requested in part c) for the year ended December 31, 2019.

Answer 1

a)
Face Value	$65,000
Semiannual Coupn Rate = 7%/2	3.50%
Semiannual Coupon Payment =	$2,275
Period = 6 x 2	12
Market Rate = 8%/2	4%
Present Value of Bond (PV(4%,12,-2275,-65000)	$61,949.85
Cash Paid for the Bonds	$61,949.85
b)
A	B	C	D	E	F	G
Period	Interest Payment = 7%/2 x $65000	Interest exp.= 8%/2 x Previous BV in G	Amortisation of bond discount (C - B)	Debit Bal. Bond discount	Cr. balance Bonds payable account	Book value of bond (F-E)
1/1/19				$3,050.15	$65,000	$61,949.85
7/1/19	$2,275	$2,477.99	$202.99	$2,847.15	$65,000	$62,152.85
1/1/20	$2,275	$2,486.11	$211.11	$2,636.04	$65,000	$62,363.96
7/1/20	$2,275	$2,494.56	$219.56	$2,416.48	$65,000	$62,583.52
1/1/21	$2,275	$2,503.34	$228.34	$2,188.14	$65,000	$62,811.86
7/1/21	$2,275	$2,512.47	$237.47	$1,950.67	$65,000	$63,049.33
1/1/22	$2,275	$2,521.97	$246.97	$1,703.69	$65,000	$63,296.31
7/1/22	$2,275	$2,531.85	$256.85	$1,446.84	$65,000	$63,553.16
1/1/23	$2,275	$2,542.13	$267.13	$1,179.72	$65,000	$63,820.28
7/1/23	$2,275	$2,552.81	$277.81	$901.90	$65,000	$64,098.10
1/1/24	$2,275	$2,563.92	$288.92	$612.98	$65,000	$64,387.02
7/1/24	$2,275	$2,575.48	$300.48	$312.50	$65,000	$64,687.50
31-Dec-24	$2,275	$2,587.50	$312.50	$0.00	$65,000	$65,000.00
c)
Assuming Luke Corporation applies IFRS
Date	Account Titles and Explanation	Debit	Credit
1/1/19	Bond Investment at Amortized Cost	$61,949.85
	Cash		$61,949.85
	To record the purchase of the investment
7/1/19	Cash	$2,275
	Bond Investment at Amortized Cost	$202.99
	Interest income		$2,477.99
	To record the receipt of the semi-annual interest payment
1/1/20	Cash	$2,275
	Bond Investment at Amortized Cost	$211.11
	Interest income		$2,486.11
	To record the receipt of the semi-annual interest payment
7/1/20	Cash	$2,275
	Bond Investment at Amortized Cost	$219.56
	Interest income		$2,494.56
	To record the receipt of the semi-annual interest payment
12/31/20	Cash	$2,275
	Bond Investment at Amortized Cost	$228.34
	Interest income		$2,503.34
	To record the receipt of the semi-annual interest payment
Assuming that Luke Corporation applies ASPE
A	B	C	D	E	F	G
Period	Interest Payment = 7%/2 x $65000	Interest exp	Amortisation of bond discount (C - B)	Debit Bal. Bond discount	Cr. balance Bonds payable account	Book value of bond (F-E)
1/1/19				$3,050.15	$65,000.00	$61,949.85
7/1/19	$2,275	$2,529.18	$254.18	$2,795.97	$65,000	$62,204.03
1/1/20	$2,275	$2,529.18	$254.18	$2,541.79	$65,000	$62,458.21
7/1/20	$2,275	$2,529.18	$254.18	$2,287.61	$65,000	$62,712.39
1/1/21	$2,275	$2,529.18	$254.18	$2,033.43	$65,000	$62,966.57
7/1/21	$2,275	$2,529.18	$254.18	$1,779.25	$65,000	$63,220.75
1/1/22	$2,275	$2,529.18	$254.18	$1,525.07	$65,000	$63,474.93
7/1/22	$2,275	$2,529.18	$254.18	$1,270.90	$65,000	$63,729.10
1/1/23	$2,275	$2,529.18	$254.18	$1,016.72	$65,000	$63,983.28
7/1/23	$2,275	$2,529.18	$254.18	$762.54	$65,000	$64,237.46
1/1/24	$2,275	$2,529.18	$254.18	$508.36	$65,000	$64,491.64
7/1/24	$2,275	$2,529.18	$254.18	$254.18	$65,000	$64,745.82
31-Dec-24	$2,275	$2,529.18	$254.18	$0.00	$65,000	$65,000.00
Date	Account Titles and Explanation	Debit	Credit
1/1/19	Bond Investment at Amortized Cost	$61,949.85
	Cash		$61,949.85
	To record the purchase of the investment
7/1/19	Cash	$2,275
	Bond Investment at Amortized Cost	$254.18
	Interest income		$2,529.18
	To record the receipt of the semi-annual interest payment
1/1/20	Cash	$2,275
	Bond Investment at Amortized Cost	$254.18
	Interest income		$2,529.18
	To record the receipt of the semi-annual interest payment
7/1/20	Cash	$2,275
	Bond Investment at Amortized Cost	$254.18
	Interest income		$2,529.18
	To record the receipt of the semi-annual interest payment
12/31/20	Cash	$2,275
	Bond Investment at Amortized Cost	$254.18
	Interest income		$2,529.18
	To record the receipt of the semi-annual interest payment