Question

B-CR7 Company purchased $120,000 of 10% bonds of S. F. Co. on January 1, 2012, at a discount, paying $100000. The bonds (mature January 1, 2016 and yield 12%; interest is payable each July 1 30 and January 1. At October 2014, CR7 sold these bonds by $97600 plus accrued interest. The bonds have the following values Date Bond Discount Carrying Amounts of Bonds Amortization 1/1/2012 1/7/2012 1/1/2013 1/7/2013 1/1/2014 1/7/2014 1/1/2015 Cash Received 4800 4800 4800 4800 4800 4800 Interest Revenue 6000 6072 6148 6230 6315 6406 2 1200 1272 1348 1430 1515 1606 100000 101200 102472 103820 105250 106765 108371​

Answer 1

To calculate the bond discount amortization, we need to first calculate the bond's carrying amount at each date:

- 1/1/2012: Carrying amount = Purchase price = $100,000
- 7/1/2012: Carrying amount = Purchase price + 1st interest payment - Discount amortization = $100,000 + $5,000 - $4800 = $101,200
- 1/1/2013: Carrying amount = Carrying amount from 7/1/2012 + 2nd interest payment - Discount amortization = $101,200 + $5,360 - $4800 = $102,472
- 7/1/2013: Carrying amount = Carrying amount from 1/1/2013 + 3rd interest payment - Discount amortization = $102,472 + $5,720 - $4800 = $103,820
- 1/1/2014: Carrying amount = Carrying amount from 7/1/2013 + 4th interest payment - Discount amortization = $103,820 + $6,180 - $4800 = $105,250
- 7/1/2014: Carrying amount = Carrying amount from 1/1/2014 + 5th interest payment - Discount amortization = $105,250 + $6,630 - $4800 = $106,765
- 1/1/2015: Carrying amount = Carrying amount from 7/1/2014 + 6th interest payment - Discount amortization = $106,765 + $7,086 - $4800 = $108,371

To calculate the bond discount amortization, we subtract the carrying amount from the bond's face value ($120,000) at each date:

- 1/7/2012: Discount amortization = Face value - Carrying amount = $120,000 - $101,200 = $18,800
- 1/1/2013: Discount amortization = Face value - Carrying amount = $120,000 - $102,472 = $17,528
- 1/7/2013: Discount amortization = Face value - Carrying amount = $120,000 - $103,820 = $16,180
- 1/1/2014: Discount amortization = Face value - Carrying amount = $120,000 - $105,250 = $14,750
- 1/7/2014: Discount amortization = Face value - Carrying amount = $120,000 - $106,765 = $13,235
- 1/1/2015: Discount amortization = Face value - Carrying amount = $120,000 - $108,371 = $11,629

At the time of sale in October 2014, the bonds had accrued interest of $1,575 ($6,300 * 3/12) since the last interest payment on July 1, 2014. The total cash received by CR7 from the sale was $97,600 + $1,575 = $99,175.

To calculate the gain or loss on the sale, we compare the cash received to the carrying amount of the bonds on the date of sale:

- Carrying amount on 10/1/2014: Carrying amount from 1/1/2015 - Discount amortization from 1/1/2015 to 10/1/2014 = $108,371 - $11,629 = $96,742
- Gain or loss on sale = Cash received - Carrying amount = $99,175 - $96,742 = $2,433

Therefore, CR7 had a gain of $2,433 on the sale of the bonds.