Question 15.1: On 1 January 2007, fictitious company Baxter Inc. invested $...
On 1 January 2007, fictitious company Baxter Inc. invested $300,000 in fictitious company Cartel Co. debt securities (with a 6 percent coupon rate on par value, payable each 31 December). The par value of the securities was $275,000. On 31 December 2007, the fair value of Baxter’s investment in Cartel is $350,000.
Assume that the market interest rate in effect when the bonds were issued was 4.5 percent.^1 If the investment is designated as held-to-maturity, the investment is reported at amortized cost using the effective interest method. A portion of the amortization table is as follows:
How would this investment be reported on the balance sheet, income statement, and statement of shareholder’s equity at 31 December 2007, under both U.S. GAAP and IFRS, if Baxter designated the investment as (1) held-to-maturity, (2) held-for-trading security, (3) available-for-sale, or (4) designated as fair value?
^1The effective interest rate method applies the market rate in effect when the bonds were issued to the current amortized cost (book value) of the bonds to obtain interest expense for the period.
End of Year | Interest Payment | Interest Income | Amortization | Carrying Value |
0 | $300,000 | |||
1 | $16,500 | $13,500 | $3,000 | $297,000 |
2 | $16,500 | $13,365 | $3,135 | $293,865 |
3 | $16,500 | $13,224 | $3,276 | $290,589 |
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