Question

Landis Company purchased $3,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $3,124,740 at an effective interest rate of 7%. Using the effective-interest method, Landis Company decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $10,620 and $10,980, respectively.

At April 1, 2019, Landis Company sold the Ritter bonds for $3,090,000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2019 was $3,097,440. Assuming Landis Company has a portfolio of Available-for-Sale Debt Securities, what should Landis Company report as a gain or loss on the bonds?

Answer 1

Landis Company should report a loss of $7,440 on the sale of Ritter bonds, as they were sold for $3,090,000, which is less than the carrying value of $3,097,440.

Step-by-step explanation:

To determine whether the Landis Company should report a gain or loss on the sale of Ritter bonds, we must compare the sale price to the carrying value of the bonds on the date of sale. On April 1, 2019, Landis Company sold the bonds for $3,090,000. The carrying value of the bonds at that time was $3,097,440, which is after accruing interest and amortizing premiums. To calculate the gain or loss, we subtract the carrying value of the bonds from the sale price:

Sale Price - Carrying Value = Gain/Loss

$3,090,000 - $3,097,440 = Loss of $7,440

This shows that Landis Company incurred a loss of $7,440 on the sale of the Ritter bonds. The loss is due to the bonds being sold for less than their carrying value. In accounting terms, this loss should be reported in the financial statements as part of Other Comprehensive Income (OCI) because the bonds were categorized as Available-for-Sale Debt Securities.