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Question 5 On January 1, 2020, Splish Company purchased $350,000, 8% bonds of Aguirre Co. for...
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| (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.)
Solutions
Expert Solution
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) |
ekkarill92 answered 2 years agoRelated Solutions
Question 5 On January 1, 2020, Splish Company purchased $350,000, 8% bonds of Aguirre Co. for...
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.
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