Question

In: Accounting

On January 1, 2020, Oriole Company purchased 11% bonds, having a maturity value of $328,000 for...

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.

Solutions

Expert Solution

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)

Related Solutions

On January 1, 2017, Sage Company purchased 11% bonds, having a maturity value of $328,000, for...
On January 1, 2017, Sage 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, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Sage 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....
On January 1, 2020, Sheridan Company purchased 11% bonds, having a maturity value of $301,000 for...
On January 1, 2020, Sheridan Company purchased 11% bonds, having a maturity value of $301,000 for $324,415.24. 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. Sheridan 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....
On January 1, 2020, Flounder Company purchased 11% bonds, having a maturity value of $320,000 for...
On January 1, 2020, Flounder Company purchased 11% bonds, having a maturity value of $320,000 for $344,893.28. 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. Flounder 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....
On January 1, 2020, Sheffield Company purchased 11% bonds, having a maturity value of $289,000 for...
On January 1, 2020, Sheffield Company purchased 11% bonds, having a maturity value of $289,000 for $311,481.74. 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. Sheffield 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....
On January 1, 2020, Pearl Company sold 11% bonds having a maturity value of $600,000 for...
On January 1, 2020, Pearl Company sold 11% bonds having a maturity value of $600,000 for $622,744, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2020, and mature January 1, 2025, with interest payable December 31 of each year. Pearl Company allocates interest and unamortized discount or premium on the effective-interest basis. Prepare a schedule of interest expense and bond amortization for 2020–2022. (Round answer to 0 decimal places, e.g. 38,548.) Prepare the journal...
On January 1, 2017, Grouper Company purchased 11% bonds, having a maturity value of $313,000, for...
On January 1, 2017, Grouper Company purchased 11% bonds, having a maturity value of $313,000, for $337,348.74. The bonds provide the bondholders with a 9% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Grouper 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....
On January 1, 2017, Bridgeport Company purchased 11% bonds, having a maturity value of $274,000, for...
On January 1, 2017, Bridgeport Company purchased 11% bonds, having a maturity value of $274,000, for $295,314.87. The bonds provide the bondholders with a 9% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Bridgeport 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....
On January 1, 2017, Bonita Company purchased 11% bonds, having a maturity value of $314,000, for...
On January 1, 2017, Bonita Company purchased 11% bonds, having a maturity value of $314,000, for $338,426.53. The bonds provide the bondholders with a 9% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Bonita 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....
On January 1, 2017, Carla Company purchased 11% bonds, having a maturity value of $274,000, for...
On January 1, 2017, Carla Company purchased 11% bonds, having a maturity value of $274,000, for $295,314.87. The bonds provide the bondholders with a 9% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Carla 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....
On January 1, 2017, Skysong Company purchased 11% bonds, having a maturity value of $274,000, for...
On January 1, 2017, Skysong Company purchased 11% bonds, having a maturity value of $274,000, for $295,314.87. The bonds provide the bondholders with a 9% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Skysong 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....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT