Question
Bonobos Balloons Inc. purchased the $60,000 par value bonds of Gnomes R Us on January 1, 2020. The coupon rate is 8% and the bonds
Bonobos Balloons Inc. purchased the $60,000 par value bonds of Gnomes R Us on January 1, 2020. The coupon rate is 8% and the bonds mature in 5 years. The market rate of interest is 12%. The bonds pay interest semi-annually every June 30 and December 31. The bonds were purchased for $51,167.90 and were classified as available-for-sale. Bonobos Balloons uses the effective-interest rate method to amortize bond discounts and premiums. At December 31, 2020, the market value of the bonds was $65,000. Bonobos Balloons sold the bonds on January 1, 2021, for $65,000.
Instructions
- Compute the carrying value of the investment at December 31, 2020.
- Compute the amount of interest revenue earned on this investment at June 30, 2020.
- Compute the amount of unrealized gain or loss recognized on December 31, 2020. In which financial statement should this amount be reported?
- Compute the amount of gain or loss recognized on the sale of the investment at January 1, 2021. In which financial statement should this amount be reported?
- If this investment was instead classified as held-to-maturity, how would this have affected the amount of unrealized gain or loss on December 31, 2020, and how would this have affected its reporting?
Computations:
Carrying value at December 31, 2020:
Interest revenue at June 30, 2020:
Unrealized gain/loss at December 31, 2020:
Gain or loss at January 1, 2021:
Requirement 5:
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