Question

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.

2017		$336,200		2020		$323,500
2018		$322,500		2021		$314,000
2019		$321,500

(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 - Bonita Company
Date	Particulars	Debit	Credit
1-Jan-17	Investment in bond Dr	$314,000.00
	Premium on bond investment Dr	$24,426.53
	To Cash		$338,426.53
	(To record investment in bond)

Solution b:

Journal Entries - Bonita Company
Date	Particulars	Debit	Credit
31-Dec-17	Interest receivables Dr ($314,000*11%)	$34,540.00
	To Premium on bond investment		$4,081.61
	To Interest revenue ($338,426.53*9%)		$30,458.39
	(To record interest revenue and premium amortization)
31-Dec-17	Fair value adjustment Dr ($336,200 + $4,081.61 - $338,426.53)	$1,855.08
	To Unrealized holding gain or loss - OCI		$1,855.08
	(To record adjustment to fair value of investment)

Solution c:

Journal Entries - Bonita Company
Date	Particulars	Debit	Credit
31-Dec-18	Interest receivables Dr ($314,000*11%)	$34,540.00
	To Premium on bond investment		$4,448.96
	To Interest revenue ($334,344.92*9%)		$30,091.04
	(To record interest revenue and premium amortization)
31-Dec-18	Unrealized holding gain or loss - OCI	$9,251.04
	To Fair value adjustment ($336,200 - $4,448.96 - $322,500)		$9,251.04
	(To record adjustment to fair value of investment)