Please help A-E Troomp Corporation acquired $7,200,000 par value, 14%, five-year
ID: 2342402 • Letter: P
Question
Please help A-E
Troomp Corporation acquired $7,200,000 par value, 14%, five-year bonds on their date of issue, January 1 of the current year. The market rate at the time of issue was 18% and interest is paid semiannually on June 30 and December 31 Troomp will use the effective interest rate method to account for this investment. Troomp intends to hold the investment until the bonds mature. Read the requirements. Requirements 1 Determine the purchase price of the investment in bonds. Prepare the journal entry to record the acquisition of the bond investment. Prepare an amortization table for the investment using the effective interest rate method Prepare the journal entry to record the interest income for the first year. Prepare the journal entry to record the sale of the bonds at the end of the third year for $6,620,000. a. b. c. d. e.Explanation / Answer
Part -(a) Purchase price of the Bonds Year Cash flows Present value @ 9% (18%/2) Present value 1 504,000 0.9174312 462,385 2 504,000 0.8416800 424,207 3 504,000 0.7721835 389,180 4 504,000 0.7084252 357,046 5 504,000 0.6499314 327,565 6 504,000 0.5962673 300,519 7 504,000 0.5470342 275,705 8 504,000 0.5018663 252,941 9 504,000 0.4604278 232,056 10 504,000 0.4224108 212,895 10 7,200,000 0.4224108 3,041,358 Purchase price of the Bonds 6,275,857 Premium on Bonds = (7,200,000-6,275,857) = 924,143 Part - (b) Journal entry on acquisition of Bonds 1/1 Investment in Bonds 7,200,000 Cash 6,275,857 Premium on Investment in Bonds 924,143 (Bond acquired) Part - (c) Amortization table Date Cash Income Amortization Carrying amount (7,200,000*7%) (Carrying amount * 9%) (Expense-Cash) 1/1 6,275,857 6/30 504,000 564,827.16 60,827 6,336,684 12/31 504,000 570,301.60 66,302 6,402,986 6/30 504,000 576,268.74 72,269 6,475,255 12/31 504,000 582,772.93 78,773 6,554,028 6/30 504,000 589,862.50 85,862 6,639,890 12/31 504,000 597,590.12 93,590 6,733,480 6/30 504,000 606,013.23 102,013 6,835,494 12/31 504,000 615,194.42 111,194 6,946,688 6/30 504,000 625,201.92 121,202 7,067,890 12/31 504,000 636,110.09 132,110 7,200,000 Part - (d) Journal entry of interest income for 1st year 6/30 Cash 504,000 Premium on Bonds payable 60,827 Interest received 564,827 (Interest received and premium amortized) 12/31 Cash 504,000 Premium on Bonds payable 66,302 Interest received 570,302 (Interest received and premium amortized) Part - (e) Cash 6,620,000 Loss on Investment in Bonds 113,480 Investment in Bonds 6,733,480 (Bond sold)