Problem
On 1/1/23, Lammer purchased $600,000 of 10-year, 5% bonds. Interest on the bonds is paid quarterly at 3/31, 6/30, 9/30, and 12/31. The bonds were purchased to yield an effective interest rate of 4.5%. At 1/1/23, Lammer had the intent and ability to hold the bonds until their maturity on 12/31/32.
I. Prepare a amortization schedule for the life of the bonds (all 10 years/40 quarters) and attach a printed copy to this test.
i. The fair market value of the bonds at 3/31/23 was $623,000.
ii. The fair market value of the bonds at 6/30/23 was $619,800.
II. Prepare the journal entry required for Lammer to record the purchase on 1/1/23.
III. Prepare the journal entries required, if any, for Lammer to record receipt of the 3/31/23 interest payment and/or the change in fair market value of the bonds.
IV. What measurement (balance) should Lammer report on its 3/31/23 balance sheet for the investment?
V. Prepare the journal entries required, if any, for Lammer to record receipt of the 6/30/23 interest payment and/or the change in fair market value of the bonds.
VI. What measurement (balance) should Lammer report on its 6/30/23 balance sheet for the investment?
VII. What current (annual) effective interest rate is implied by the current fair value of the bonds at 6/30/23 (this would be the current market rate for the bond but would not change the bond's accounting)?