Question
In: Accounting
On January 1, 2017, Buffalo Company purchased $290,000, 6% bonds of Aguirre Co. for $266,477. The...
On January 1, 2017, Buffalo Company purchased $290,000, 6% bonds of Aguirre Co. for $266,477. The bonds were purchased to yield 8% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2022. Buffalo Company uses the effective-interest method to amortize discount or premium. On January 1, 2019, Buffalo Company sold the bonds for $267,985 after receiving interest to meet its liquidity needs.
| (c) | Prepare the journal entries to record the semiannual interest on (1) July 1, 2017, and (2) December 31, 2017. | |
| (d) | If the fair value of Aguirre bonds is $269,985 on December 31, 2018, prepare the necessary adjusting entry. (Assume the fair value adjustment balance on January 1, 2017, is a debit of $3,303.) | |
| (e) | Prepare the journal entry to record the sale of the bonds on January 1, 2019. |
(Round answers to 0 decimal places, e.g. 2,500. 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 |
|
|
(c) |
(1) |
July 1, 2017 |
|||
| (2) |
Dec. 31, 2017 |
||||
|
(d) |
Dec. 31, 2018 |
||||
|
(e) |
Jan. 1, 2019 |
||||
Solutions
Expert Solution
| a) | |||||
| Jan-01 | Debt investments | 266477 | |||
| Cash | 266477 | ||||
| b) | |||||
| Date | Cash received(290000*6%*6/12) | Interest revenue | Bond Discount Amortization(8%) | Carrying Amount of Bonds | |
| 01-01-17 | 266477 | ||||
| 07-01-17 | 8700 | 10659 | 1959 | 268436 | |
| 01-01-18 | 8700 | 10737 | 2037 | 270474 | |
| 07-01-18 | 8700 | 10819 | 2119 | 272592 | |
| 01-01-19 | 8700 | 10904 | 2204 | 274796 | |
| 07-01-19 | 8700 | 10992 | 2292 | 277088 | |
| 01-01-20 | 8700 | 11084 | 2384 | 279472 | |
| 07-01-20 | 8700 | 11179 | 2479 | 281950 | |
| 01-01-21 | 8700 | 11278 | 2578 | 284528 | |
| 07-01-21 | 8700 | 11381 | 2681 | 287210 | |
| 01-01-22 | 8700 | 11490 | 2790 | 290000 | |
| total | 87000 | 110523 | 23523 | ||
| c) | |||||
| 01-01-17 | Cash | 8700 | |||
| debt investments | 1959 | ||||
| Interest revenue | 10659 | ||||
| 31-12-17 | Interest receivable | 8700 | |||
| debt investments | 2037 | ||||
| Interest revenue | 10737 | ||||
| d) | |||||
| 31-12-18 | Unrealised Holding Gain or Loss - Equity | 8114 | |||
| Fair value adjustment | 8114 | ||||
| Securities | AFS | Fair value | Unrealised Gain/(loss) | ||
| Agguire | 274796 | 269985 | -4811 | ||
| Previous balance | 3303 | ||||
| Fair value adjustment | -8114 | cr | |||
| e) | |||||
| 01-01-19 | Cash | 267985 | |||
| Loss on sale of investments | 6811 | ||||
| Debt investments | 274796 | ||||
| Selling price of bonds | 267985 | ||||
| Less:amortized cost | -274796 | ||||
| Realsied loss on sale of investments | -6811 | ||||
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