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    Mini Case #4

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    Amy Clementine
    JK Industries purchased $1 million face value bonds with an 8% coupon rate that mature in 10 years. The market rate was 6% on the purchase date. The bonds were purchased at a premium and recorded at $1,136,034. Interest income is recorded annually using the effective interest method. In 2020, the market rate fell to 4% and the bonds' fair value increased to $1,269,310. Unrealized gains are recorded in other comprehensive income.

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    Mini Case #4

    Uploaded by

    Amy Clementine
    297 views2 pages
    JK Industries purchased $1 million face value bonds with an 8% coupon rate that mature in 10 years. The market rate was 6% on the purchase date. The bonds were purchased at a premium and recorded at $1,136,034. Interest income is recorded annually using the effective interest method. In 2020, the market rate fell to 4% and the bonds' fair value increased to $1,269,310. Unrealized gains are recorded in other comprehensive income.

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    JK Industries purchased $1 million face value bonds with an 8% coupon rate that mature in 10 years. The market rate was 6% on the purchase date. The bonds were purchased at a premium and recorded at $1,136,034. Interest income is recorded annually using the effective interest method. In 2020, the market rate fell to 4% and the bonds' fair value increased to $1,269,310. Unrealized gains are recorded in other comprehensive income.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    297 views2 pages

    Mini Case #4

    Uploaded by

    Amy Clementine
    JK Industries purchased $1 million face value bonds with an 8% coupon rate that mature in 10 years. The market rate was 6% on the purchase date. The bonds were purchased at a premium and recorded at $1,136,034. Interest income is recorded annually using the effective interest method. In 2020, the market rate fell to 4% and the bonds' fair value increased to $1,269,310. Unrealized gains are recorded in other comprehensive income.

    Copyright:

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

    ACC 808

    Spring 2021

    Mini Case #4
    On January 1, 2019, JK industries purchased bonds with a face amount of $1 million and a
    coupon interest rate of 8%. The bonds mature in 10 years and pay coupons annually on
    December 31 of each year. The market rate of interest on January 1, 2019 for bonds of this type
    was 6%. JK industries closes its books on December 31 and the bonds are considered Available
    for Sale. Ignore taxes.

    Note: Recall from class that interest income is generally calculated the same way for all three
    categories of securities (trading, AFS, and HTM), even though the accounting methods differ.
    That is, interest income for a fixed-rate instrument is calculated using the amortized cost of the
    security based on the market yield AT ACQUISITION, and NOT the current fair value and market
    yield.

    1. At what price were the bonds issued? You can use the price or net present value
    function in Excel to compute the value.
    $1,147,202
    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 2019. Record all the necessary entries for the bonds during 2019.
    2019/01/01
    Bonds Receivable 1,136,034
    Cash 1,136,034

    2019/12/31
    Cash 80,000
    Bonds Receivable 11,168
    Interest Income 68,832
    4. Now assume the credit risk of the bonds stays the same but at the end of 2020 the
    market rate of interest for bonds of this type changes to 4%. Using Excel, estimate the
    ACC 808
    Spring 2021

    fair value of the bonds on 12/31/2020. Also use Excel to prepare a new amortization
    schedule based on the new fair value.
    Fv of bonds on 12/31/2020: $1,269,310

    5. Using the original assumptions (as in question three), record all the necessary entries
    related to the bonds for 2020.
    2020/12/31
    Cash 80,000
    Bonds Receivable 11,838
    Interest Income 68,162

    2020/12/31
    Unrealized gain in AFS securities (OCI) 145,114
    AFS fair market adjustment 145,114
    6. Assume the credit risk of the bonds stays constant and interest rates do not change
    during 2021. Record all the necessary entries related to the bonds for 2021.
    2021/12/31
    Cash 80,000
    Bonds Receivable 29,228
    Interest Income 50,772
    7. What is the value of the bonds recognized on the balance sheet on 12/31/2021?

    1,240,082

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