Question

Samuel company purchased a bond which carries a coupon rate of 10%. The bond is a 5 million 3 year bond. The bond was purchased in Jan 1 2019 to yield 12%. The interest is payable annually and the principal is to be repaid on maturity date.

The market interest rate

on Dec 31 2019 is 11.5%.

On dec 21 2020 12.5%.

On dec 21 2021 9%

assuming the bond is accounted

at fair value through profit or loss

Compute the ff:

1. Purchase price of the bond

2. The carrying amount of the investment on Dec 31 2019

3. The interest income on 2019

4. The gain or loss to be presented in profit or loss on Dec 31 2019

5. The carrying amount of the investment on Dec 31 2020.

6. The interest income on 2020

7. The gain or loss to be presented in profit or loss on Dec 31 2020

8. The gain or loss on sale on July 1 2021

Answer 1

1)

Face value of Bond = 5 million

Maturity = 3 years

Purchase date of Bond = Jan 1,2019

Coupon rate = 10%

Annual coupon amount = 5 million*10% = 0.5 million

Yield on Bond as on Jan 1,2019 = 12%

Purchase price of Bond =

0.5 million*Present value annuity factor(12%,3) + 5 million*Present value interest factor(12%3)

= 0.5 million*2.4018 + 5 million*0.7118

= 1.2009 million + 3.559 million = 4.7599 million i.e. 4.76 million

2)

Face value of Bond = 5 million

Maturity = 2 years

Coupon rate = 10%

Annual coupon amount = 5 million*10% = 0.5 million

Yield on Bond as on Dec 31,2019 = 11.5%

Carrying amount of Bond as on Dec 31,2019 =

0.5 million*Present value annuity factor(11.5%,2) + 5 million*Present value interest factor(11.5%,2)

= 0.5 million*1.7012 + 5 million*0.8044

= 0.8506 million + 4.022 million = 4.8726 million i.e. 4.87 million

3)

Cash interest income on 2019 =

Annual coupon amount = 5 million*10% = 0.5 million

4)

Value of Bond as on Jan 1,2019 = 4.76 million

Value of Bond as on Dec 31,2019 = 4.87 million

Gain to be presented as on Dec 31,2019 = 4.87 million - 4.76 million = $0.11 million​​​​​