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divyagovil1
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| Posted: 08 Apr 2009 at 20:21 | IP Logged
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On July 1, 1992, York Co. purchased as a held-to-maturity investment $1,000,000 of Park, Inc.'s 8% bonds for $946,000, including accrued interest of $40,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, 1999, and pay interest annually on January 1. York uses the effective interest method of amortization. In its December 31, 1992, balance sheet, what amount should York report as investment in bonds?
Sol. $911,300
Explanation provided :-
The carrying amount of the bonds is $906,000 on July 1, 1992 ($946,000 - $40,000). The discount is amortized for 6 months (July 1 to December 31):
Interest revenue ($906,000 x 10% x 6/12) $ 45,300
Interest receivable ($1,000,000 x 8% x 6/12) (40,000)
Discount amortized $ 5,300
The carrying amount on December 31, 1992, is $906,000 + $5,300 = $911,300.
Can someone pls provide me the journal entries which would be recorded in York co.'s books both at July 1 and Dec 31, 1992 (bond was issued between interest dates )
Thanks in advance !
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Divya - CO State
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sanju06
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| Posted: 08 Apr 2009 at 22:03 | IP Logged
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As on Jul1,1992:
DR. Investment 906,000
DR. Accrued interest 40,000
CR. Cash 946,000
As on Dec.31,1992
Dr.Cash 80,000
Dr.Investment 5300
Cr. Interest income 85,300
Thus investment stands at 906000+5300=911,300
Hope I am right!
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prettynpink
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| Posted: 08 Apr 2009 at 22:38 | IP Logged
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7/1/1992
DR Investment 906,000
DR Interest Receivable 40,000
CR cash 946,000
12/31/92
DRInterest Receivable 40,000
DRBond Investment 5,300
CRInterest Revenue 45300
correct me if im wrong..God bless
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divyagovil1
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| Posted: 08 Apr 2009 at 22:41 | IP Logged
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Thanks, Sanjana.... Basically, I am getting confused about the amortization portion. Amortization period is the time period over which bonds are outstanding. (from the date bonds are sold)
In this case, from July 1, 1992 to Dec 31,1998
If I take this time period, then at the end of maturity period, there would be balance standing in unamortized discount account. We know at the end of the period, the Net Carrying Value = Face Value. So, how to proceed in this question? Would the excess discount be amortized in last year?
I have prepared the table as follows:-
| Date |
Face Value |
Beginning of period Net CV |
10% Annual Amortization interest |
JE Impact |
Difference |
End of Period Net CV |
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I/S |
B/S |
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NCV X Effective |
FaceXCoupon8% |
Amortization |
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| 12/31/1992 |
1,000,000 |
906,000 |
10% |
90,600 |
80,000 |
5,300 |
911,300 |
| 12/31/1993 |
1,000,000 |
911,300 |
10% |
91,130 |
80,000 |
11,130 |
922,430 |
| 12/31/1994 |
1,000,000 |
922,430 |
10% |
92,243 |
80,000 |
12,243 |
934,673 |
| 12/31/1995 |
1,000,000 |
934,673 |
10% |
93,467 |
80,000 |
13,467 |
948,140 |
| 12/31/1996 |
1,000,000 |
948,140 |
10% |
94,814 |
80,000 |
14,814 |
962,954 |
| 12/31/1997 |
1,000,000 |
962,954 |
10% |
96,295 |
80,000 |
16,295 |
979,250 |
| 12/31/1998 |
1,000,000 |
979,250 |
10% |
97,925 |
80,000 |
17,925 |
997,175 |
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91,175 |
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Balance in unamortized discount |
2,825 |
| I am not sure what I am missing out !! Please provide your inputs. Thanks!
__________________
Divya - CO State
Passed using Becker Review :
FAR - 04/11/09 - 94
BEC - 05/30/09 - 86
REG - 08/29/09 - 95
AUD - 11/21/09 - 92
Ethics - 2011
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sanju06
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| Posted: 08 Apr 2009 at 22:41 | IP Logged
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I am sorry, I made a mistake in my entry. I guess this must be the entry
Dr. Cash 80,000
Dr. Investment 5300
Cr. Interset revenue 45,300
Cr. Accrued interest 40,000
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Topic: Bonds issued between dates
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