Question

On January 1, 2020, Oriole Company purchased 11% bonds, having a maturity value of $328,000 for $353,515.61. The bonds provide the bondholders with a 9% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest received on January 1 of each year. Oriole Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale category. The fair value of the bonds at December 31 of each year-end is as follows.

2020
$351,400      
2023
$338,100
2021
$337,000      
2024
$328,000
2022
$336,000              

(a)       Prepare the journal entry at the date of the bond purchase.
(b)       Prepare the journal entries to record the interest revenue and recognition of fair value for 2020.
(c)       Prepare the journal entry to record the recognition of fair value for 2021.

Answer 1

Ans.

a. Prepare the journal entry at the date of the bond purchase.

No.	Date	Account Titles	Debit	Credit
(a)	01-01-20	Debt Investment	353515.61
		Cash		353515.61

b. Prepare the journal entries to record the interest revenue and recognition of fair value for 2020.

Bond Amortization Schedule:

Date	Cash received	Interest revenue	Premium amoritized	Carrying amount of bonds
01-01-20				$353,515.61
31-12-20	$                 36,080.00	$              31,816.40	$     4,263.60	$349,252.01
31-12-21	$                 36,080.00	$              31,432.68	$     4,647.32	$344,604.70
31-12-22	$                 36,080.00	$              31,014.42	$     5,065.58	$339,539.12
31-12-23	$                 36,080.00	$              30,558.52	$     5,521.48	$334,017.64
31-12-24	$                 36,080.00	$              30,061.59	$     6,018.41	$327,999.23

Formulas

Date	Cash received	Interest revenue	Premium amoritized	Carrying amount of bonds
01-01-20				353515.61
31-12-20	=328000*11%	=+G91*9%	=+D92-E92	=+G91-F92
31-12-21	=328000*11%	=+G92*9%	=+D93-E93	=+G92-F93
31-12-22	=328000*11%	=+G93*9%	=+D94-E94	=+G93-F94
31-12-23	=328000*11%	=+G94*9%	=+D95-E95	=+G94-F95
31-12-24	=328000*11%	=+G95*9%	=+D96-E96	=+G95-F96

No.	Date	Account Titles	Debit	Credit
(b)	31-12-20	Cash	$                   36,080.00
		Debt Investment		$                  4,263.60
		Interest Revenue		$               31,816.40
		[To record interest received]
	31-12-20	Fair Value Adjustment	$                     2,147.99
		Unrealized Holding Gain or Loss - Equity [$ 351,400 - $ 349252.01]		$                  2,147.99
		[To record fair value adjustment]

c. Prepare the journal entry to record the recognition of fair value for 2021.

No.	Date	Account Titles	Debit	Credit
(c)	31-12-21	Unrealized Holding Gain or Loss - Equity	$                     9,752.69
		Fair Value Adjustment		$                  9,752.69

Note:

Calculation of Fair Value Adjustment ( 31-12-2021)
Amortized Cost	$                 344,604.70
Fair Value	$                 337,000.00
Unrealized Holding Gain or Loss	$                   (7,604.70)
Already adjusted	$                   (2,147.99)
Fair Value Adjustment for 2021	$                   (9,752.69)