Question

A company purchased bonds on July 1, 2021, for $193,404. This price represents a market rate of 9% on bonds that have a face amount of $200,000, have a stated rate of 8%, pay semiannual interest, and mature in 4 years. As of December 31, 2021, the fair value of the bonds has increased to $195,000. Assuming the investment is classified as held-to-maturity securities, what amount would the company report for its investment in bonds on December 31, 2021

Answer 1

On December 31, 2021, the company would report its investment in held-to-maturity bonds at the purchase price of $193,404, despite the fair value increase, because these investments are recorded at amortized cost rather than fair value.

Step-by-step explanation:

The company purchased bonds on July 1, 2021, and these bonds are classified as held-to-maturity securities. The fair value has increased to $195,000 by December 31, 2021, but as the investment is in the category of held-to-maturity, the fair value change is not recognized in the financial statements. The held-to-maturity investments are recorded at amortized cost.

Therefore, the amount that the company would report for its investment in bonds on December 31, 2021, is the purchase price of $193,404. This is because with held-to-maturity securities, the accounting focuses on the principle of amortized cost rather than marking to market. The temporary increase in fair value does not alter the carried amount of the investment on the balance sheet. As the bonds approach maturity, the company would amortize any discount or premium over the remaining life of the bond.

Answer 2

$194,107

Step-by-step explanation:

if the bonds were available for sale, then they should be recorded at market price = $195,000

but these bonds are held to maturity bonds, therefore, they must be recorded at carrying value:

amortization of bond discount = ($193,404 x 9%/2) - ($200,000 x 8%/2) = $8,730 - $8,000 = $703

carrying value = $193,404 + $703 = $194,107