High School

On July 2, 2021, Astrotech Inc. purchased $530,000 of Sain Corp. 4% bonds at a price of $488,688 to yield a market interest rate of 5%. The bonds pay interest semi-annually on July 1 and January 1, and mature on July 1, 2031. Astrotech plans to hold this investment until it matures.

At December 31, 2021, which is the year-end for both companies, the bonds were trading at 94% of face value.

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Answer :

At December 31, 2021, Astrotech Inc. would report the investment in Sain Corp. bonds on its balance sheet at a fair value of $498,200, based on the bonds trading at 94% of face value.

The fair value of the investment is calculated by multiplying the face value of the bonds ($530,000) by the market price of 94%. This results in a fair value of $498,200. Astrotech would adjust the carrying value of the investment to reflect this fair value on its balance sheet as of December 31, 2021.

The difference between the initial purchase price of $488,688 and the fair value of $498,200 represents an unrealized gain in value of the investment. However, since Astrotech plans to hold the investment until maturity, this unrealized gain is not recognized in the income statement. Instead, it is reported as a separate component of comprehensive income and disclosed in the equity section of Astrotech's financial statements. The interest income earned from the bonds for the period from July 2, 2021, to December 31, 2021, would still be recognized as interest revenue in Astrotech's income statement, based on the bond's coupon rate of 4% and the carrying value of the investment during that period.

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