Question

On January 1, 2014, Corporation A purchases bonds in Corporation B. The bonds have a par value of $50,000 and a stated interest rate of 6%, with annual interest payments on December 31 and a maturity date of December 31, 2023. Corporation A purchases the bonds for $43,290 to yield 8% interest, and holds the bonds in its trading account. On December 31, 2014, the fair value of the bonds is $45,000. When the bond market opens on January 2, 2015, Corporation B sells the bonds for an amount intended to achieve a 7% yield for Corporation A. Disregarding accrued interest, what gain (rounded to whole dollars) should Corporation A recognize on the bonds in 2015?

Answer 1

Disregarding accrued interest, gain (rounded to whole dollars) Corporation A should recognize on the bonds in 2015 is $1,742.

Step-by-step explanation:

We were told that Corporation A holds the bonds in its trading account. these bonds would be reported December 31, 2014 at fair value of $45,000 and the Unrealized holding gains are recognized in earnings of 2014.

On January 2, 2015, Corporation B sells the bonds for an amount intended to achieve a 7% yield.

Annual interest payment = $50,000*6%

= $3,000

Maturity date = December 31, 2023.

Time to maturity = 9 years

To get sale price, we will use PV function of excel:

PV (rate, nper, pmt, fv, type)

sale value = PV (7%, 9, -3000, -50000, 0)

= $46,742.38

Disregarding accrued interest, gain (rounded to whole dollars) Corporation A should recognize on the bonds in 2015

= Sales value - Fair value as reported as on December 31, 2014

= $46,742.38 - $45,000

= $1,742

Therefore, Disregarding accrued interest, gain (rounded to whole dollars) Corporation A should recognize on the bonds in 2015 is $1,742.