On January 1, 2014, Power Ltd. issued bonds with a maturity value of $5 million for $4,797,000, when the market rate of interest was 8%. The bonds have a coupon (contractual) interest rate of 7% and mature on January 1, 2019. Interest on the bonds is payable semi-annually on July 1 and January 1 of each year. On January 1, 2014, Finance Company purchased Power Ltd. bonds with a maturity value of $1 million to earn interest. On December 31, 2014, the bonds were trading at 98. Both companies' year end is December 31.

Instructions

(a) What amount did Finance Company pay for Power Ltd.'s bonds?

(b) Prepare the journal entry for Finance Company (investor) on January 1, 2014.

(c) Prepare a bond amortization schedule for Finance Company for the first four interest periods.

(d) Prepare the journal entries for Finance Company to record (1) the receipt of interest on July 1, 2014; (2) the accrual of interest on December 31, 2014; and (3) the receipt of interest on January 1, 2015.

(e) Show how the bonds and related income statement accounts would be presented in Finance Company's financial statements for the year ended December 31, 2014.

(f) Prepare the journal entry for Power Ltd. (investee) on January 1, 2014.

(g) Using the bond amortization schedule prepared in part (c) to calculate the interest expense and interest payments, prepare the journal entries for Power Ltd. to record (1) the payment of interest on July 1, 2014; (2) the accrual of interest on December 31, 2014; and (3) the payment of interest on January 1, 2015.

(h) Show how the bonds and related income statement accounts would be presented in Power Ltd.'s financial statements for the year ended December 31, 2014.

(i) Assume that Finance Company reports under IFRS and that it purchased the bonds to trade. Prepare any required journal entries or adjusting journal entries on July 1, 2014, and December 31, 2014.

(j) Assuming Finance Company purchased the bonds for purposes of trading, show how the bonds and related income statement accounts would be presented in Finance Company's financial statements for the year ended December 31, 2014.

Taking It Further

Assume that Finance Company needed cash and sold the bonds on the open market on January 1, 2015, for 99.5 after receiving and recording the semi-annual interest payment. Indicate the amount of gain or loss that Finance Company would record if the bonds were purchased to (1) earn interest, and (2) trade.