Norris Corporation purchased a $500,000 held-to-maturity security on January 1, 2003. The company was expecting a 4% rate of return. The security matured on December 31, 2004.
a. Determine the amount that Norris would have been willing to pay for the security on January 1, 2003.
b. Assume that interest rates remain at 4%. What will be the value of the security on December 31, 2004?
c. Prepare the entries necessary on the following dates: January 1, 2003 for the purchase of the security, December 31, 2003, adjusting entry, December 31, 2004, adjusting entry
d. Assume that, instead of remaining stable at 4%, interest rates rise to 6% over the life of the security. What would you expect to happen to the value of the security over its life? Explain. Would it change any of the accounting requirements? Explain.
e. Assume that because of continuing economic weakness, interest rates fall to 3%. What would you expect the value of the security to be on December 31, 2003 and December 31, 2004?
f. Assuming interest rates fell to 3%, prepare any necessary adjusting entries related to the security that would be required on December 31, 2003, and December 31, 2004.