Question #69 - Reading 8 Intercorporate Investments

Reading: Reading 8 Intercorporate Investments

PDF File: Reading 8 Intercorporate Investments.pdf

Page: 30

Status: Unattempted

Shared Context

- What is the balance sheet carrying value of the securities under each of the classifications at year-end? FVPL FVOCI A) $71,500 $71,500 B) $90,000 $71,500 C) $90,000 $90,000

Question

If the fixed income portfolio outlined in Exhibit 2 is remains classified as amortized cost, which of the following is closest to the interest income reported in the income statement for the year ending 31st December 2013?

Answer Choices:

A. $1,079,000

B. $1,086,000

Explanation

The bonds will be accounted for using the amortized cost method. Interest will be calculated using the yield at the date of purchase. Yield at date of purchase can be calculated as follows: 10 N, −25,893,577 PV, 625,000 PMT, 25,000,000 FV CPT I/Y = 2.1%. This is semiannual. The annual yield is 4.2%. Asset Interest (2.1%) Coupon 6m 25,893,577 543,765 625,000 1yr 25,812,342 542,059 625,000 18m 25,729,401 540,317 625,000 2yr 25,644,718 538,539 625,000 Total interest in 2013 (i.e., year 2) is $540,317 + $538,539 = $1,078,856.

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