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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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On January 1, 2019, Weaver Company purchased as held-to-maturity debt securities $500,000 face value of Park Corporation’s 8% bonds for $456,200. The bonds were purchased to yield 10% interest and pay interest annually. The bonds mature on January 1, 2024. Weaver uses the effective interest method of amortization. What amount should Weaver report on its December 31, 2019, balance sheet as an investment in held-to-maturity debt securities?

  1. a. $450,580
  2. b. $456,200
  3. c. $461,820
  4. d. $466,200

To determine

Identify the amount at which the investment in held to maturity debt securities are reported on the balance sheet at December 31, 2019.

Explanation

Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

Held-to-maturity securities: these are the securities which are purchased with an intension to hold the securities till their maturity.

Calculate the amount of cash received as interest on December 31, 2019.

Cash = Face value of bond×Statedinterest rate×Time period=$500,000×8%×1 year=$500,000×8100×1=$40,000

Calculate the amount of interest income.

Interest income = [[Book value of the investmentat the beginning of the period]×Effectiveinterest rate×1year]=$456,200×10%×1year=$456,200×10100×1=$45,620

Calculate the amount of amortization

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