Question

On January 1, 2020, Sarasota Company purchased $432,000 worth of 8% bonds of Aguirre Co. for $398,642. The bonds were purchased to yield 10% interest. Interest is payable semi-annually, on July 1 and January 1. The bonds mature on January 1, 2025. Sarasota Company uses the effective interest method to amortize the discount or premium. On January 1, 2022, to meet its liquidity needs, Sarasota Company sold the bonds for $400,384, after receiving interest.

Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as FV-OCI. (Credit account titles are automatically indented when the 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. Round answers to 0 decimal places, e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1

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Prepare the amortization schedule for the bonds. (Round answers to 0 decimal places, e.g. 5,275.)

Schedule of Interest Revenue and Bond Discount Amortization—Effective-Interest Method
Date		Interest Receivable Or Cash Received		Interest Revenue		Bond Discount Amortization		Carrying Amount of Bonds
1/1/20								$
7/1/20		$		$		$
12/31/20
7/1/21
12/31/21
7/1/22
12/31/22
7/1/23
12/31/23
7/1/24
12/31/24
Total		$		$		$

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Prepare the journal entries to record the semi-annual interest on July 1, 2020, and December 31, 2020. (Credit account titles are automatically indented when the 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. Round answers to 0 decimal places, e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
July 1
Dec. 31

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Assuming the fair value of Aguirre bonds is $402,544 on December 31, 2021, prepare the necessary adjusting entry. (Assume that the fair value adjustment on December 31, 2020 was a debit of $3,645.) (Credit account titles are automatically indented when the 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. Round answers to 0 decimal places, e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Dec. 31

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Prepare the journal entry to record the sale of the bonds on January 1, 2022, including reclassifying holding gains or losses to net income. (Credit account titles are automatically indented when the 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. Round answers to 0 decimal places, e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1
	(To adjust to fair value at date of disposal)
Jan. 1
	(To record disposal)
Jan. 1
	(To reclassify holding loss)

Answer 1

1. Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as FV-OCI.

Answer:

Date	General Journal	Debit	Credit
01-01-2020	FV-OCI Investments	398,642
	Cash		398,642
	To record purchase of bonds

2. Prepare the amortization schedule for the bonds.

Answer:

Date	Interest Receivable Or Cash Received (a)	Interest Revenue (b)	Bond Discount Amortization (a) - (b)	Carrying Amount of Bonds
01-01-20				398,642
07-01-20	17,280	19,932	2,652	401,294
01-01-21	17,280	20,065	2,785	404,079
07-01-21	17,280	20,204	2,924	407,003
01-01-22	17,280	20,350	3,070	410,073
07-01-22	17,280	20,504	3,224	413,296
01-01-23	17,280	20,665	3,385	416,681
07-01-23	17,280	20,834	3,554	420,235
01-01-24	17,280	21,012	3,732	423,967
07-01-24	17,280	21,198	3,918	427,885
12-31-2024	17,280	21,394	4,114	432,000
	172,800	206,158	33,358

Calculation:

Yield = 10%

Interest rate = 8%

Interest Receivable Or Cash Received = 432000 x 8% /2 = 17,280

Interest Revenue = Carrying Amount of Bonds x  yield /2 = 398,642 x 10% / 2 = 19,932

Bond Discount Amortization = Interest Revenue - Interest Receivable Or Cash Received = 19,932 - 17,280 = 2,652

Carrying Amount of Bond = previous carrying value + Bond Discount Amortization = 398,642 + 2,652 = 401,294

3. Prepare the journal entries to record the semi-annual interest on July 1, 2020, and December 31, 2020

Answer:

Date	General Journal	Debit	Credit
07-01-20	Cash	17,280
	FV-OCI Investments	2,652
	Interest Income		19,932
12-31-2020	Interest Receivable	17,280
	FV-OCI Investments	2,785
	Interest Income		20,065

Calculation:

Here, the calculation done in required (2) is considered and filled out from the amortization table.

4. Assuming the fair value of Aguirre bonds is $402,544 on December 31, 2021, prepare the necessary adjusting entry. (Assume that the fair value adjustment on December 31, 2020 was a debit of $3,645.)

Answer:

Date	General Journal	Debit	Credit
31-12-21	Unrealized Gain or Loss—OCI	11,174
	FV-OCI Investments		11,174

Calculation:

The difference of amortized cost and fair value is the unrealized loss. The amortized cost of the bonds on December 31, 2021 from the table is taken as the amortized cost. Fair value is given in the question. Then we need to deduct the Previous fair value adjustment—Dr. given to get the Fair value adjustment—Cr.

Securities	Amortized Cost	Fair Value	Unrealized Gain (Loss)
Aguirre	410,073	402,544	(7,529)
Previous fair value adjustment—Dr.			3,645
Fair value adjustment—Cr.			(11,174)

5. Prepare the journal entry to record the sale of the bonds on January 1, 2022, including reclassifying holding gains or losses to net income.

Answer:

No.	Date	General Journal	Debit	Credit
1	01-01-22	Unrealized Gain or Loss—OCI	2,160
		FV-OCI Investments		2,160
		To adjust to fair value at date of disposal
2	01-01-22	Cash	400,384
		FV-OCI Investments		400,384
		To record disposal
3	01-01-22	Loss on Sale of Investments	9,689
		Unrealized Gain or Loss - OCI		9,689
		To reclassify holding loss

Calculation:

Entry #1:

Unrealized Gain or Loss—OCI = 400384 - 402544 = -2,160

Entry #3:

Loss on Sale of Investment =   410,073 - 400384 = 9,689