Chapter 16, Problem 16.2P

Debt Investments, Trading. Freder Software Group acquired $1,550,000 par value, zero coupon, 5-year bonds on their date of issue, January 1 of the current year. The market rate at the time of issue was 6% and interest is compounded annually. Freder uses the effective interest rate method to account for this investment. The company classifies the investment as a trading security. The fair value of the bonds at the end of the year of acquisition is $1,097,500.

Required

1. a. Determine the purchase price of the investment in bonds.
2. b. Prepare the journal entry to record the acquisition of the bond investment.
3. c. Prepare an amortization table assuming that Freder uses the effective interest rate method.
4. d. Prepare the journal entry to record the interest income for the first 2 years.
5. e. Prepare the journal entry required to adjust the investment’s carrying amount to fair value at the end of the first year.
6. f. Prepare the journal entry to record the sale of the investment on January 2 of Year 2 for a net price of $987,150.