Question

Presented below is information taken from a bond investment amortization schedule with related fair values provided. These bonds are classified as available-for-sale.

		12/31/20		12/31/21		12/31/22
Amortized cost		$457,200		$521,200		$526,600
Fair value		$462,700		$510,000		$526,600

(a) Indicate whether the bonds were purchased at a discount or at a premium.

                                                          DiscountPremium

(b)		Prepare the adjusting entry to record the bonds at fair value at December 31, 2020. The Fair Value Adjustment account has a debit balance of $900 prior to adjustment.
(c)		Prepare the adjusting entry to record the bonds at fair value at December 31, 2021.

No.	Date	Account Titles and Explanation	Debit	Credit
(b)	Dec. 31, 2020
(c)	Dec. 31, 2021

Answer 1

a.) The bonds were purchased a t a discount as the Amortized costs are increasing on a Year on Year basis.

b.) Fair Value Adjustment = ($462,700 - $457,200) - $900 = $5,500 - $900 = $4,600

No.	Date	Account Titles and Explanation	Debit	Credit
b.)	Dec. 31,2020	Fair Value Adjustment	$ 4,600
		Unrealized gain- Other comprehensive income		$ 4,600

c.) Unrealized loss = ($521,200 - $510,000) + ($4,600 + $900) = $11,200 + $5,500 = $16,700

No.	Date	Account Titles and Explanation	Debit	Credit
c.)	Dec. 31,2021	Unrealized loss- Other comprehensive income	$ 16,700
		Fair Value Adjustment		$ 16,700

Note:- Account titles have been used as per GAAP in absence of any chart of accounts. The actual account titles may vary depending upon the options available in the chart of accounts.

The fair value adjustments have been recorded because the bonds are classified as available for sale.

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