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