On January 1, 2011, Ithaca Corp. purchases Cortland Inc. bonds that have a face value of $150,000

P 12-15 Fair value option; held-to-maturity investments

On January 1, 2011, 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:

January 1, 2011 7.0%
June 30, 2011 8.0%
December 31, 2011 9.0%

Required:
1. Calculate the price Ithaca would have paid for the Cortland bonds on January 1, 2011 (ignoring brokerage fees), and prepare a journal entry to record the purchase.
2. Prepare all appropriate journal entries related to the bond investment during 2011, 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 2011, 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.


Click here for the solution: On January 1, 2011, Ithaca Corp. purchases Cortland Inc. bonds that have a face value of $150,000

Bonds are frequently issued at amounts greater or less than face value

Bonds are frequently issued at amounts greater or less than face value. Describe how the market interest rate, relative to the contractual interest rate, affects the selling price of bonds. Also, explain the rationale for requiring an investor to pay accrued interest when a bond is purchased between interest payment dates.

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On January 1, Flory Company issued $300,000, 8%, 5-year bonds at face value

E10-11 On January 1, Flory Company issued $300,000, 8%, 5-year bonds at face value. Interest is payable semiannually on July 1 and January 1.

Instructions:
Prepare journal entries to record the following events.
The issuance of the bonds.
The payment of interest on July 1, assuming no previous accrual of interest.
The accrual of interest on December 31.

Click here for the solution: On January 1, Flory Company issued $300,000, 8%, 5-year bonds at face value