Question

On January 1, 2017, Blue Company purchased 12% bonds, having a maturity value of $276,000, for $296,924.88. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Blue 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.

2017		$294,800		2020		$286,100
2018		$285,000		2021		$276,000
2019		$284,100

(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 2017.
(c)		Prepare the journal entry to record the recognition of fair value for 2018.

Answer 1

Solution a:

Journal Entries - Blue Company
Date	Particulars	Debit	Credit
1-Jan-17	Investment in bond Dr	$276,000.00
	Premium on bond investment Dr	$20,924.88
	To Cash		$296,924.88
	(To record investment in bond)

Solution b:

Journal Entries - Blue Company
Date	Particulars	Debit	Credit
31-Dec-17	Interest receivables Dr ($276,000*12%)	$33,120.00
	To Premium on bond investment		$3,427.51
	To Interest revenue ($296,924.88*10%)		$29,692.49
	(To record interest revenue and premium amortization)
31-Dec-17	Fair value adjustment Dr ($294,800 + $3,427.51 - $296,924.88)	$1,302.63
	To Unrealized holding gain or loss - OCI		$1,302.63
	(To record adjustment to fair value of investment)

Solution c:

Journal Entries - Blue Company
Date	Particulars	Debit	Credit
31-Dec-18	Interest receivables Dr ($276,000*12%)	$33,120.00
	To Premium on bond investment		$3,770.26
	To Interest revenue ($293,497.37*10%)		$29,349.74
	(To record interest revenue and premium amortization)
31-Dec-18	Unrealized holding gain or loss - OCI	$6,029.74
	To Fair value adjustment ($294,800 - $3,770.26 - $285,000)		$6,029.74
	(To record adjustment to fair value of investment)