Question

Loban Quinzi Associates acquired $7,570,000 par value, 4%, 20 year bonds on their date of issue, January 1 of the current year. The market rate at the time of issue is 14%, and interest is paid semiannually on June 30 and Dec 31. Quninzi uses the effective interest rate method to account for this investment. It does not intend to hold the investment until maturity, nor will it actively trade the bonds. The fair value of the bonds at the end of the year of acquistion is %5,198,000. Requirements A. Determine the purchase price of the investment in bonds. B. Prepare the journal entry to record the acquisition of the bond investment. C. Prepare the journal entries to record the interest income for the first year. D. Prepare the journal entry required to adjust the investment's carrying amount to fair value at year-end, if necessary.

Answer 1

The question addresses accounting for the purchase and adjusting for fair value of bonds using the effective interest rate method. The answer clarifies that present value calculations are needed but cannot be completed without additional information or a numerical table.

Step-by-step explanation:

The student's question about Loban Quinzi Associates acquiring bonds involves calculating the present value of these bonds, accounting for the purchase, and adjusting the carrying amount to fair value at year-end. This process requires an understanding of the effective interest rate method, the market rate, and the concept of present value. However, full assistance in preparing the actual journal entries based on the given facts is not possible without the required numerical table or additional details on the bond's price and interest calculations. To calculate the value of a bond at a given discount rate, the present value formula for each future payment is added to the present value of the face value of the bond. An example for a simple two-year bond issued at $3,000 with an 8% interest rate would show that if interest rates rise, the present value of the bond would decrease using the higher discount rate.