On July 2, 2018, Imperial Inc. purchased $500,000 of Acme Corp. 5% bonds at a price to yield a market interest rate of 6%. The bonds pay interest semi-annually on July 1 and January 1, and mature on July 1, 2028. Imperial plans to hold this investment until it matures. At December 31, 2018, which is the year end for both companies, the bonds were trading at 93 (this means 93% of maturity value).
Instructions
(a) Calculate the present value (issue price) of the bonds on July 2, 2018.
(b) For Imperial, the investor, record
1. The purchase of the bonds on July 2, 2018,
2. The accrual of interest on December 31, 2018,
3. The receipt of interest on January 1, 2019, and
4. The receipt of interest on July 1, 2019.
(c) For Acme, the investee (issuer), record
1. The issue of the bonds on July 2, 2018,
2. The accrual of interest on December 31, 2018,
3. The payment of interest on January 1, 2019, and
4. The payment of interest on July 1, 2019.
(d) Explain how your responses to parts E12.11(a) and E12.11(b) would differ if Imperial classified the bond investment as a held for trading investment instead of one that would be held until maturity.