Business, 13.11.2019 06:31 darrengresham999

On january 1, 2014, corporation a purchases bonds in corporation b. the bonds have a par value of $50,000 and a stated interest rate of 6%, with annual interest payments on december 31 and a maturity date of december 31, 2023. corporation a purchases the bonds for $43,290 to yield 8% interest, and holds the bonds in its trading account. on december 31, 2014, the fair value of the bonds is $45,000. when the bond market opens on january 2, 2015, corporation b sells the bonds for an amount intended to achieve a 7% yield for corporation a. disregarding accrued interest, what gain (rounded to whole dollars) should corporation a recognize on the bonds in 2015?

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Disregarding accrued interest, gain (rounded to whole dollars) Corporation A should recognize on the bonds in 2015 is $1,742.

Explanation:

We were told that Corporation A holds the bonds in its trading account. these bonds would be reported December 31, 2014 at fair value of $45,000 and the Unrealized holding gains are recognized in earnings of 2014.

On January 2, 2015, Corporation B sells the bonds for an amount intended to achieve a 7% yield.

Annual interest payment = $50,000*6%

= $3,000

Maturity date = December 31, 2023.

Time to maturity = 9 years

To get sale price, we will use PV function of excel:

PV (rate, nper, pmt, fv, type)

sale value = PV (7%, 9, -3000, -50000, 0)

= $46,742.38

Disregarding accrued interest, gain (rounded to whole dollars) Corporation A should recognize on the bonds in 2015

= Sales value - Fair value as reported as on December 31, 2014

= $46,742.38 - $45,000

= $1,742

Therefore, Disregarding accrued interest, gain (rounded to whole dollars) Corporation A should recognize on the bonds in 2015 is $1,742.

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