Question

Question 5 On January 1, 2020, Splish Company purchased $350,000, 8% bonds of Aguirre Co. for $322,973. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2025. Splish Company uses the effective-interest method to amortize discount or premium. On January 1, 2022, Splish Company sold the bonds for $324,733 after receiving interest to meet its liquidity needs.

Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available-for-sale. (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.) Date Account Titles and Explanation Debit Credit Jan. 1, 2020 SHOW LIST OF ACCOUNTS LINK TO TEXT

Prepare the amortization schedule for the bonds. (Round answers to 0 decimal places, e.g. 1,250.)

(c)		Prepare the journal entries to record the semiannual interest on (1) July 1, 2020, and (2) December 31, 2020.
(d)		If the fair value of Aguirre bonds is $326,733 on December 31, 2021, prepare the necessary adjusting entry. (Assume the fair value adjustment balance on December 31, 2020, is a debit of $3,212.)
(e)		Prepare the journal entry to record the sale of the bonds on January 1, 2022.

(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.)

Answer 1

Answer :

(a) Journal entry to record the purchase of bonds on January 1 :

Date	Account Titles and Explanation	Debit	Credit
Jan. 1, 2020	Debt Investments - Available for Sale	$322,973
	Cash		$322,973

(b) Preparation of the amortization schedule for the bonds :

Date	Interest Receivable Or Cash Received	Interest Revenue	Bond Discount Amortization	Carrying Amount of Bonds
1/1/2020				$322,973
7/1/2020	14,000	$16,149	$2,149	325,122
12/31/2020	14,000	$16,256	$2,256	327,378
7/1/2021	14,000	$16,369	$2,369	329,747
12/31/2021	14,000	$16,487	$2,487	332,234
7/1/2022	14,000	$16,612	$2,612	334,846
12/31/2022	14,000	$16,742	$2,742	337,588
7/1/2023	14,000	$16,879	$2,879	340,467
12/31/2023	14,000	$17,023	$3,023	343,491
7/1/2024	14,000	$17,175	$3,175	346,665
12/31/2024	14,000	$17,335	$3,335	350,000
Total	$140,000	$167,027	$27,027

(c) Journal entries to record the semiannual interest on July 1, 2020, and December 31, 2020 :

Date	Account Titles and Explanation	Debit	Credit
July 1, 2020	Cash	$14,000
	Debt Investments - Available for Sale	$2,149
	Interest Income		$16,149
December 31, 2020	Interest Receivable	$14,000
	Debt Investments - Available for Sale	$2,256
	Interest Income		$16,256

(d) Adjusting entry as on December 31, 2021 :

Date	Account Titles and Explanation	Debit	Credit
December 31, 2021	Unrealized Gain or Loss	$8,713
	Debt Investments - Available for Sale		$8,713

Note : Calculation of Fair Value Adjustment needed :

Amortized cost of securities as on december 31, 2021	$332,234
Less : Fair Value of of securities as on december 31, 2021	$326,733
Add :Previous fair value adjustment Debit balance	$3,212
Fair Value Adjustment needed	$8,713

(e) Journal entry to record the sale of the bonds on January 1, 2022 :

Date	Account Titles and Explanation	Debit	Credit
January 1, 2022	Unrealized Gain or Loss	$2,000
	Debt Investments - Available for Sale		$2,000
	( 324,733 -326,733)
January 1, 2022	Cash	$324,733
	Debt Investments - Available for Sale		$324,733
January 1, 2022	Loss on Sale of Investments	$7,501
	Unrealized Gain or Loss		$7,501
	(324,733 - 332,234)