Question

Q18 Neuman classifies its investment in bonds as available-for-sale investment. The investment was purchased at a discount. Which of the following associated account balance(s) must reach zero by the maturity date?

Multiple Choice

• Discount on Bonds Payable, OCI-unrealized gain or loss

• Discount on Bonds Payable, fair value adjustment, OCI-unrealized gain or loss

• Discount on Bonds Payable

• Discount on Bonds Payable, fair value adjustment

Answer 1

Correct answer:- Discount on Bonds Payable, fair value adjustment, OCI-unrealized gain or loss

Discount on bonds payable must be zero at the end of the maturity date. Because all Discount on bonds payable must be amortized during the life of the bonds payable using either effective interest method or straight amortization method.

If the bonds investment is accounted as available-for-sale investment. Then company needs to records the classification entry to eliminate the fair value adjustment, OCI-unrealized gain or loss.

Date	Account title	Debit	Credit
At the date of maturity.	OCI-unrealized gain	XXX
	Fair value adjustment		XXX
	To record for reclassification of OCI-unrealized gain.
Date	Account title	Debit	Credit
At the date of maturity.	Fair value adjustment	XXX
	OCI-unrealized loss		XXX
	To record for reclassification of OCI-unrealized loss.