On 1 January 20X3, XYZ bought a $200,000 5% bond at nominal value. Interest is received in arrears. The bond will be redeemed at a premium of $26,225 over nominal value on 31 December 20X5. The effective rate of interest is 9%. The fair value of the bond was as follows: 31 Dec 20X3: $212,000 31 Dec 20X4: $215,000 Required: Show your calculations how the bond will be accounted for at the years ended 31 December 20X3 and 20X4 if: a) XYZ's business model is to trade bonds in the short term. Assume that XYZ sold this bond for its fair value of on 1 January 20X4. b) XYZ’s business model is to hold bonds until the redemption date. c) XYZ's business model is to hold bonds until redemption but also to sell them if investments with higher returns become available
On 1 January 20X3, XYZ bought a $200,000 5% bond at nominal value. Interest is received in arrears. The bond will be redeemed at a premium of $26,225 over nominal value on 31 December 20X5. The effective rate of interest is 9%. The fair value of the bond was as follows: 31 Dec 20X3: $212,000 31 Dec 20X4: $215,000 Required: Show your calculations how the bond will be accounted for at the years ended 31 December 20X3 and 20X4 if: a) XYZ's business model is to trade bonds in the short term. Assume that XYZ sold this bond for its fair value of on 1 January 20X4. b) XYZ’s business model is to hold bonds until the redemption date. c) XYZ's business model is to hold bonds until redemption but also to sell them if investments with higher returns become available
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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On 1 January 20X3, XYZ bought a $200,000 5% bond at nominal value. Interest is received in arrears. The bond will be redeemed at a premium of $26,225 over nominal value on 31 December 20X5. The effective rate of interest is 9%.
The fair value of the bond was as follows:
31 Dec 20X3: $212,000
31 Dec 20X4: $215,000
Required: Show your calculations how the bond will be accounted for at the years ended 31 December 20X3 and 20X4 if:
a) XYZ's business model is to trade bonds in the short term. Assume that XYZ sold this bond for its fair value of on 1 January 20X4.
b) XYZ’s business model is to hold bonds until the redemption date.
c) XYZ's business model is to hold bonds until redemption but also to sell them if
investments with higher returns become available.
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