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  • Mini Case #5: Recall From Mini Case #4: Interest Income For A Fixed-Rate Instrument Is Calculated Using The Amortized

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    Amy Clementine
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    1) The Three Brothers Inc. purchased $2 million face value bonds with a 7% coupon rate that mature in 10 years. The bonds were issued at a discount of $196,840 due to the market interest rate being higher at 8.5%. 2) An amortization schedule is prepared using the effective interest method to calculate interest income, amortization, and carrying value over the life of the bond. 3) In 2021, the entry is made to record the $140,000 interest income for the period and increase the bond carrying value by $13,269 for amortization.

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    1) The Three Brothers Inc. purchased $2 million face value bonds with a 7% coupon rate that mature in 10 years. The bonds were issued at a discount of $196,840 due to the market interest rate being higher at 8.5%. 2) An amortization schedule is prepared using the effective interest method to calculate interest income, amortization, and carrying value over the life of the bond. 3) In 2021, the entry is made to record the $140,000 interest income for the period and increase the bond carrying value by $13,269 for amortization.

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    98 views2 pages

    Mini Case #5: Recall From Mini Case #4: Interest Income For A Fixed-Rate Instrument Is Calculated Using The Amortized

    Uploaded by

    Amy Clementine
    1) The Three Brothers Inc. purchased $2 million face value bonds with a 7% coupon rate that mature in 10 years. The bonds were issued at a discount of $196,840 due to the market interest rate being higher at 8.5%. 2) An amortization schedule is prepared using the effective interest method to calculate interest income, amortization, and carrying value over the life of the bond. 3) In 2021, the entry is made to record the $140,000 interest income for the period and increase the bond carrying value by $13,269 for amortization.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 2

    ACC 808

    Spring 2021

    Mini Case #5
    On January 1, 2021, The Three Brothers Inc. purchased bonds with a face value of $2 million and a
    coupon rate of 7%. The bonds mature in 10 years and pays coupons annually on December 31 of each
    year. The market rate of interest on January 1, 2021 for bonds of this type was 8.5%. The Three
    Brothers Inc. closes its book on December 31, and the bonds are considered Available for Sale (AFS).
    Ignore taxes.

    Recall from Mini Case #4: Interest income for a fixed-rate instrument is calculated using the amortized
    cost of the security and the market yield at acquisition, not its current fair value and current market
    yield.

    1. At what price were the bonds issued?


    $1,803,160

    2. Using the effective interest method, prepare an amortization schedule in Excel that includes the
    interest income, amortization, and bond carrying value for the life of the bond.

    3. Assume the credit risk of the bonds stays constant and interest rates do not change during
    2021. Record all the necessary entries for the bonds during 2021.

    2021/01/01
    Bonds Receivable 1,803,160
    Cash 1,803,160

    2021/12/31
    Cash 140,000
    Bonds Receivable 13,269
    Interest Income 153,269
    4. Now assume the credit risk of the bonds stays the same but at the end of 2021, the market rate
    of interest for bonds of this type changes to 9%. Using Excel, estimate the fair value of the
    bonds on 12/31/2021. Also use Excel to prepare a new amortization schedule based on the new
    fair value.
    ACC 808
    Spring 2021

    5. Record all the necessary entries related to the bonds for 2022. Hint: What is the beginning and
    ending balance of the bond in 2022.
    2022/12/31
    Cash 140,000
    Bonds Receivable 14,396
    Interest Income 154,396

    AFS fair market adjustment 56,238


    Unrealized loss in AFS securities 56,238

    6. Assume the credit risk of the bonds stays constant and interest rates do not change during
    2023. What is the value of the bonds recognized on the balance sheet on 12/31/2023? Also,
    record all the necessary entries related to the bonds for 2023.
    $1,798,682
    2023/12/31
    Cash 140,000
    Bonds Receivable 15,620
    Interest Income 155,620

    AFS fair market adjustment 2,797


    Unrealized loss in AFS securities 2,797

    Please submit you answers in a word document with the related excel tables copied into the
    document.

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