Question

On January 1, 2017, Indigo Company purchased 12% bonds, having a maturity value of $320,000, for $344,260.74. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Indigo Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale category. The fair value of the bonds at December 31 of each year-end is as follows.

2017		$342,000		2020		$330,700
2018		$329,700		2021		$320,000
2019		$328,700

(a)		Prepare the journal entry at the date of the bond purchase.
(b)		Prepare the journal entries to record the interest revenue and recognition of fair value for 2017.
(c)		Prepare the journal entry to record the recognition of fair value for 2018.

(Round answers to 2 decimal places, e.g. 2,525.25. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.	Date	Account Titles and Explanation	Debit	Credit
(a)	choose a transaction date Jan. 1, 2017Dec. 31, 2017Dec. 31, 2018	enter an account title to record transaction A	enter a debit amount	enter a credit amount
		enter an account title to record transaction A	enter a debit amount	enter a credit amount
(b)	choose a transaction date Jan. 1, 2017Dec. 31, 2017Dec. 31, 2018	enter an account title to record interest received	enter a debit amount	enter a credit amount
		enter an account title to record interest received	enter a debit amount	enter a credit amount
		enter an account title to record interest received	enter a debit amount	enter a credit amount
		(To record interest received)
		enter an account title to record fair value adjustment	enter a debit amount	enter a credit amount
		enter an account title to record fair value adjustment	enter a debit amount	enter a credit amount
		(To record fair value adjustment)
(c)	choose a transaction date Jan. 1, 2017Dec. 31, 2017Dec. 31, 2018	enter an account title to record transaction C	enter a debit amount	enter a credit amount
		enter an account title to record transaction C	enter a debit amount	enter a credit amount

Answer 1

(a) Journal Entries of Bond Purchase are as follows:-
Date	Account Title	Debit	Credit
1/1/2017	Debt Investments	$        344,260.74
	To Cash		$         344,260.74
	(b)To record interest revenue
31/12/2017	Interest Receivable	$          38,400.00
	Debt Investment		$             3,973.93
	Interest Revenue		$           34,426.07
	(b) To Record Fair Value Adjustment for 31 Dec 2017 :-
31/12/2017	Fair Value Adjustment (Available-for-Sale)	$            1,712.49
	To Unrealized Holding Gain or Loss-Equity		$             1,712.49
	=((344260.74.7-3973.93)-342000)

(c) To Record Fair Value Adjustment for 31 Dec 2018 :-
31/12/2018	Unrealized Holding Gain or Loss-Equity	$            7,947.25
	To Fair Value Adjustment (Available-for-Sale)		$             7,947.25
	(Working Note)

Book value at December 31, 2017	$        340287.51
Less: Premium Amortized =(320000*12%)-(344260.74-3973.93)*10%	$           4371.32
Book Value at December 31, 2018	$        335,916.19
Fair Value at December 31, 2018	$        329,700.00
Accumulated unrealized loss	$            6,216.19
Add: Unrealized gain already recognized	$ 1712.49
Unrealized loss to be recognized in 20188	$            7,928.68

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