On January 1, 2014, Surge Ltd. issued bonds with a maturity value of $6 million at 104

Question:

On January 1, 2014, Surge Ltd. issued bonds with a maturity value of $6 million at 104 when the market rate of interest was 4.5%. The bonds have a coupon (contractual) interest rate of 5% and mature on January 1, 2024.

Interest on the bonds is payable semi-annually on July 1 and January 1 of each year. On January 1, 2014, Treasury

Ltd. purchased Surge Ltd. bonds with a maturity value of $2 million to earn interest. On December 31, 2014, the bonds were trading at 103. Both companies' year end is December 31.

Instructions

(a) What amount did Treasury Ltd. pay for Surge Ltd.'s bonds?

(b) Prepare the journal entry for Treasury Ltd. (investor) on January 1, 2014.

(d) Prepare the journal entries for Treasury Ltd. to record the receipt of interest on July 1, 2014, the accrual of interest on December 31, 2014, and the receipt of interest on January 1, 2015. Show how the bonds and related income statement accounts would be presented in Treasury Ltd.'s financial statements for the year ended December 31, 2014.

(e) Prepare the journal entry for Surge Ltd. (investee) on January 1, 2014.

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

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

(h) Assume that Treasury Ltd. 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.

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

Taking It Further

Did the market interest rate on the bonds increase or decrease between January 1, 2014, and December 31, 2014? Will Treasury Ltd. want the market interest rate on the bonds to increase or decrease if it holds the bonds to earn interest? Explain.

Financial Statements
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