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On January 1, 2018, Ithaca Corp. purchases Cortland Inc. bonds that have a face value of $150,000. The Cortland bonds have a stated interest rate of 6%. Interest is paid semiannually on June 30 and December 31, and the bonds mature in 10 years. For bonds of similar risk and maturity, the market yield on particular dates is as follows (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):January 1, 2018 7.0 %June 30, 2018 8.0 %December 31, 2018 9.0 %Required:1. Calculate the price Ithaca would have paid for the Cortland bonds on January 1, 2018 (ignoring brokerage fees).2. Prepare all appropriate journal entries related to the bond investment during 2018, assuming Ithaca accounts for the bonds as a held-to-maturity investment. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds.3. Prepare all appropriate journal entries related to the bond investment during 2018, assuming that Ithaca chose the fair value option when the bonds were purchased, and that Ithaca determines fair value of the bonds semiannually. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds.

User Arjjun
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Answer:

Step-by-step explanation:

Requirement 1

Bond Fair Value at 1/1/2018:

Interest [($150,000 x 6%) / 2] x 14.21240 * = $ 63,956

Principal $150,000 x 0.50257 ** = 75,386

Present value of the receivable $139,342

* present value of an ordinary annuity of $1: n=20, i=3.5% (=7% ÷ 2)

Number of semiannual payment period (n)= Number of years x 2 = 10 x 2

= 20 years payment period

present value of $1: n=20, i=3.5% (=7% ÷ 2)

January 1, 2018

Investment in bonds (face amount)..................... 150,000

Discount on bond investment (difference)...... 10,658

Cash (price of bonds)....................................... 139,342

Requirement 2

January 1, 2018

Investment in bonds (face amount)..................... 150,000

Discount on bond investment (difference)...... 10,658

Cash (price of bonds)....................................... 139,342

June 30, 2018

Cash [(150,000 x 6%) / 2]..................................... 4,500

Discount on bond investment (difference)......... 377

Interest revenue [($150,000 – 10,658) x 7%] / 2 ... 4,877

December 31, 2018

Cash (6% / 2 x $150,000)..................................... 4,500

Discount on bond investment (difference)......... 390

Interest revenue [{$150,000 – ($10,658 – 377)} x 7%] / 2 4,890

Note: For held-to-maturity investments, there are no adjustments to fair value.

Requirement 3

January 1, 2018

Investment in bonds (face amount)..................... 150,000

Discount on bond investment (difference)...... 10,658

Cash (price of bonds)....................................... 139,342

June 30, 2018

Cash ($150,000 x 6%) / 2 .................................... 4,500

Discount on bond investment (difference)......... 377

Interest revenue [($150,000 – 10,658) x 7%] / 2 .. 4,877

Bond Fair Value at June 30, 2018:

Interest [($150,000 x 6%) / 2] x 13.13394 * = $ 59,103

Principal $150,000 x 0.47464 ** = 71,196

Present value of the receivable $130,299

present value of an ordinary annuity of $1: n=19, i=4% (=8% ÷ 2)

** present value of $1: n=19, i=4% (=8% ÷ 2)

January 1 initial cost $139,342

Increase from discount amortization 377

June 30 amortized initial cost $139,719

Comparing the amortized initial cost with the fair value of the bonds on that date provides the amount needed to adjust the investment to its fair value.

June 30 amortized initial cost $139,719

June 30 fair value 130,299

Fair value adjustment needed $ 9,420

Net unrealized holding gains and losses—I/S .......................... ..... 9,420

Fair value adjustment................................................................... 9,420

December 31, 2018

Cash ($150,000 x 6%) / 2.................................... 4,500

Discount on bond investment (difference)......... 390

Interest revenue [{$150,000 – ($10,658 – 377)} x 7%] / 2 4,890

Bond Fair Value at December 31, 2018:

Interest [($150,000 x 6%) / 2] x 12.15999 * = $ 54,720

Principal $150,000 x 0.45280 ** = 67,920

Present value of the receivable $122,640

* present value of an ordinary annuity of $1: n=18, i=4.5% (=9% ÷ 2)

** present value of $1: n=18, i=4.5% (=9% ÷ 2)

June 30 amortized initial cost $139,719

Increase from discount amortization 390

Dec. 31 amortized initial cost $140,109

Comparing the amortized initial cost with the fair value of the bonds on that date provides the amount needed to adjust the investment to its fair value.

Dec. 31 amortized initial cost $140,109

Dec. 31 fair value 122,640

Fair value adjustment balance needed: debit/(credit) $ 17,469

Less: Current fair value adjustment debit/(credit) (9,420)

Change in fair value adjustment needed $ 8,049

Net unrealized holding gains and losses—I/S .......................... ..... 8,049

Fair value adjustment................................................................... 8,049

User Puce
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