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In: Accounting

23. On January 1, 2019, Mancunian Corp. purchased 10% bonds, with a $200,000 face value, for...

23. On January 1, 2019, Mancunian Corp. purchased 10% bonds, with a $200,000 face value, for $218,492.52. This price implies an 8% yield to Mancunian. The bonds pay interest on December 31 of each year. Mancunian uses the effective-interest method and classifies the bonds as available for sale securities.

The fair value of the bonds on December 31, 2019 equals $217,200. The fair value of the bonds on December 31, 2020 equals $208,340.

Prepare the journal entries to:

1. Record the purchase of the bonds on January 1, 2019.

2. Record receipt of interest on December 31, 2019.

3. Record the fair value adjustment on December 31, 2019.

4. Record receipt of interest on December 31, 2020.

5. Record the fair value adjustment on December 31, 2020.

6. Record the sale of these bonds on January 1, 2021 for $209,000. cash.

Solutions

Expert Solution

Answer :

Step 1: workings

Date cash received interest revenue Premium Amortized Carrying amount of bond Fair value Unrealised gain/loss
Jan 1, 2019 2,18,492.52
Dec 31,2019 20,000 17,479.40 2,520.60 2,15,971.92 2,17,200 1,228.08
Dec 31, 2020 20,000 17,277.75 2,722.25 2,13,249.67 2,08,340 (4,909.67)

Journal entries :

1)

Date Account title Debit Credit
Jan 1, 2019 Investment in bond - AFS 2,18,492.52
Cash 2,18,492.52

2)

Date Account title Debit Credit
Dec 31, 2019 cash 20,000
Interest revenue 17,479.40
Investment in bonds - AFS 2,520.60

3)

Date Account title Debit credit
Dec 31, 2019 Fair value adjustment 1,228.08
Unrealised holding gain - OCI 1,228.08

4)

Date Account title Debit Credit
Dec 31, 2020 Cash 20,000
Interest revenue 17,277.75
Investment in bonds - AFS 2,722.25

5)

Date Account title Debit Credit
Dec 31, 2020 Unrealised holding loss - OCI 6,137.75
Fair value adjustment (1,228.08 + 4,909,.67) 6,137.75

6)

Date Account title Debit Credit
Jan 1, 2021 Fair value adjustment 4,909,.67
Accumulated other comprehensive income 4,909,.67
Jan 1 , 2021 Cash 2,09,000
Loss on sale of investment 4,249.67
Investment in bonds - AFS 2,13,249.67

ekkarill92 answered 5 months ago
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