Question

On 1 January 20X4, Queen Company purchased $5,700,000 of Sport Corp. 9% bonds, classified as an FVOCI-Bonds investment. The bonds pay semi-annual interest each 30 June and 31 December. The market interest rate was 7% on the date of purchase. The bonds mature on 31 December 20X8.

(PV of $1, PVA of $1, and PVAD of $1.) (Use appropriate factor(s) from the tables provided.)

Required:

1. Calculate the price paid by Queen Company. (Round time value factor to 5 decimal places. Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollar amount.)

2. Construct a table that shows interest revenue reported by Queen, and the carrying value of the investment, for the first two interest periods. Use the effective-interest method. (Round your answers to the nearest whole dollar amount.)

Period	Cash Payment	3.5% Interest Revenue	Premium Amortization	Bond Carrying Value
0
1
2

3. Queen has a June 30 year-end. On June 30, 20X4, the fair value of the investment was $6,010,000. Prepare the journal entries required on June 30 related to this investment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest whole dollar amount.)

Record the Interest revenue.

Record the adjustment to fair value.

4. Prepare the journal entry for the second payment of interest received on December 31, 20X4. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest whole dollar amount.)

Record the Interest revenue for December 31.

Answer 1

Solution 1:

Computation of bond price
Table values are based on:
n=	10
i=	3.50%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.7089	$5,700,000	$4,040,837
Interest (Annuity)	8.3166	$256,500	$2,133,209
Price of bonds			$6,174,047

Solution 2:

Period	Cash Payment	3.5% Interest Revenue	Premium Amortization	Bond Carrying Value
0			$474,047	$6,174,047
1	$256,500	$216,092	$40,408	$6,133,639
2	$256,500	$214,677	$41,823	$6,091,816

solution 3:

Journal Entries - Chin Company
Date	Particulars	Debit	Credit
30-Jun-20X4	Cash Dr	$256,500.00
	To Interest revenue		$216,092.00
	To Premium on bond investment		$40,408.00
	(To record interest revenue)
30-Jun-20X4	Unrealized holding gain or loss - OCI Dr	$123,639.00
	To Fair value adjustment ($6,133,639 - $6,010,000)		$123,639.00
	(To record fair value adjustment on bond investment)

Solution 4:

Journal Entries - Chin Company
Date	Particulars	Debit	Credit
31-Dec-20X4	Cash Dr	$256,500.00
	To Interest revenue		$214,677.00
	To Premium on bond investment		$41,823.00
	(To record interest revenue)