Question

On January 1, 2020, Metlock, Inc. purchased 9% bonds having a maturity value of $467,000 for $482,467.83. The bonds provide the bondholders with an 8% yield. The bonds are dated January 1, 2020, and mature January 1, 2024, with interest receivable on January 1 of each year. Metlock, Inc. uses the effective interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale. The fair value of the bonds at December 31 of each year-end is as follows.

2020		$477,600
2021		$478,600
2022		$473,400
2023		$467,000

Prepare the journal entry at the date of the bond purchase. (Round answers to 2 decimal places, e.g. 5,125.67. 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.)

Prepare the journal entries to record the interest revenue and recognition of fair value for 2020. (Round answers to 2 decimal places, e.g. 5,125.67. 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.)

Prepare the journal entry to record the recognition of fair value for 2021. (Round answers to 2 decimal places, e.g. 5,125.67. 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.)

Answer 1

Date	Account Titles	Debit $	Credit $
01-01-2020	Investment in 9% Bond	482,467.83
	Cash		482,467.83
31-12-2020	Interest Receivable	42,030.00
	Investment in 9% Bond		3,432.57
	Interest Revenue		38,597.43
31-12-2020	Unrealized holding gain or loss-Income	1,435.26
	Fair Value adjustment		1,435.26
	(479,035.26 - 477,600 )
31-12-2021	Fair Value adjustment	4,707.18
	Unrealized holding gain or loss-Income		4,707.18
	(478,600 - 475,328.08 ) + 1,435.26
Workings:
Date	Interest receivable @9% on 467,000-A	Interest Revenue @8% on opening carrying amount -B	Amortization of Premium	Balance of premium on bond	Carrying Amount $
01-01-2020	-	-	-	15,467.83	482,467.83
31-12-2020	42,030.00	38,597.43	3,432.57	12,035.26	479,035.26
31-12-2021	42,030.00	38,322.82	3,707.18	8,328.08	475,328.08
31-12-2022	42,030.00	38,026.25	4,003.75	4,324.32	471,324.32
31-12-2023	42,030.00	37,705.95	4,324.32	-0.00	467,000.00
Total	168,120.00		15,467.83