On January 1, the Cheng Corporation purchased $ 10,000 of 5%,five- year bonds as a long- term investment. Interest is paidannually. The company is not involved in active trading ofsecurities.
Using the format presented in the chapter, record each of thefollowing transactions.
A. Record the purchase of the bonds for$ 10,000.
B. Record the receipt of the firstinterest payment on the bonds in part A.
C. Assuming the company intends to holdthe bonds to maturity, what entry is necessary at the end of thefirst year if the market value of the bonds is $ 10,400 at thattime?
D. Show how the answer to part C woulddiffer if the company does not intend to hold the bonds tomaturity.
E. Assume that the companypurchased these bonds at a cost of $ 10,445. This price yields aneffective rate of 4%.
F. Record the receipt of thefirst interest payment on the bonds purchased in part E.
G. Assuming the company intends to holdthe bonds to maturity, prepare the necessary entry at the end ofthe first year to reflect the $ 10,400 market value of thebonds.
H. Show how the answer to part G woulddiffer if the company does not intend to hold the bonds tomaturity.
I. Report the carryingvalue (book value) of the bonds at the end of the first year inparts C, D, G, and H. Explain how the amounts have beencalculated.
J. Prepare an amortizationtable for the bonds purchased in E, assuming the company holds thebonds to maturity. What is the total amount of cash received? Whatis the total amount of interest revenue? What is the differencebetween the two?