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26 May, 18:27

On July 1, 20x1, Fox Co. purchased as a held-to-maturity investment $5,000,000 of Owl, Inc.'s 8% bonds for $4,580,000, including accrued interest of $50,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, 20x8, and pay interest annually on January 1. Fox uses the effective interest method of amortization. In its December 31, 20x1, balance sheet, what amount should Fox report as investment in bonds?

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  1. 26 May, 18:48
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    The amount fox should report on Dec 31,20x1 = $4,556,500

    Explanation:

    The carrying amount of bonds = $4,580,000 - $50,000

    The carrying amount of bonds = $4,530,000

    Amortization of discount from july 1 to dec 31 (6 months):

    Interest Revenue = $4,530,000 * 10% * 6/12

    Interest Revenue = $226500

    Interest Receivable = $5,000,000 * 8% * 6/12

    Interest Receivable = $200000

    Discount amortized = Interest Revenue - Interest Receivable

    Discount amortized = $226500 - $200000

    Discount amortized = $26500

    So:

    The amount fox should report on Dec 31,20x1 = $4,530,000 + $26500

    The amount fox should report on Dec 31,20x1 = $4,556,500
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