Question

On October 1, Dennis Company purchased $200,000 face value 12% bonds for 98 plus accrued interest and brokerage fees and classified them as held-to-maturity securities. Interest is paid semiannually on January 1 and July 1. Brokerage fees for this transaction were $700. At what amount should investment - Held to Maturity be recorded?

Answer 1

The investment - Held to Maturity should be recorded at $203,700.

Step-by-step explanation:

The investment - Held to Maturity should be recorded at the cost of the bonds, which is $200,000 plus any accrued interest and brokerage fees. In this case, the cost of the bonds is $200,000 and the brokerage fees are $700. Accrued interest needs to be calculated based on the time between the last interest payment and the purchase date.

Since interest is paid semiannually on January 1 and July 1, and the purchase date is on October 1, there are 3 months between the last interest payment and the purchase date (October, November, and December). Assuming the bond pays interest using a 360-day year, the accrued interest is calculated as: $200,000 x (12%/2) x (3/12).

Accrued interest = $200,000 x (12%/2) x (3/12) = $3,000

Therefore, the investment - Held to Maturity should be recorded at $200,000 + $700 + $3,000 = $203,700.