On July 1, 2010, Richmond Company purchased 8% bonds of Commonwealth Corporation with a par value of $400, 000 for $350, 000 to yield 10%.The bonds are to be held to maturity and pay interest semiannually on June 30 and December 31.The market value of the bonds on December 31, 2010, was $380, 000.Richmond should report the bond investment at December 31, 2010, at

Question

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The bonds were purchased for $350,000 and there were no transactions during the year. Therefore, the carrying value of the bonds at the end of the year should be the same as the initial cost: $350,000. However, the market value of the bonds increased to $380,000, which means that there is an unrealized gain of $30,000 ($380,000 - $350,000). Since the bonds are held to maturity and there were no transactions, the unrealized gain should not be recognized in the income statement. Instead, it should be recognized in a separate component of equity called "unrealized gain on available-for-sale securities." Therefore, the bond investment should be reported at December 31, 2010, at its cost of $350,000, adjusted for the unrealized gain of $1,500 ($30,000/20 semiannual periods), which results in a carrying value of $351,500. Therefore, the best choice is B.

On July 1, 2010, Richmond Company Purchased 8% Bonds of Commonwealth