Question

Finman Corporation acquired a long-term investment $65 million of 4% bonds, dated July 1, 2017. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Finman paid $60 million for the bonds. The company will receive interest semiannually on June 30 and December 31. Company management is holding the bonds in its trading portfolio. As a result of changing market conditions, the fair value of the bonds at December 31, 2017, was $62 million.

Required: 1. Prepare the journal entry to record Finman’s investment in the bonds on July 1, 2017.

2. Prepare the journal entries by Finman to record interest on December 31, 2017, at the effective (market) rate 3. Prepare any additional journal entry necessary for Finman to report its investment in the December 31, 2017, balance sheet.

Answer 1

DATE	ACCOUNT TITLES AND EXPLANATION			DEBIT	CREDIT
						1-Jul	Investment in Bonds      Dr			60
	TO Bank				60
	(Investment made)
31-Dec	Bank                   Dr			1.3
	To Interest on Bonds				1.3
	(65*4%/2)
	Investment in Bonds   Dr			2
	To Interest on Bonds				2
	(Bonds apprecation accounted)