Question

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.

2017		$351,400		2020		$338,100
2018		$337,000		2021		$328,000
2019		$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 2017.
(c)		Prepare the journal entry to record the recognition of fair value for 2018.

Answer 1

a)	Debt investments-AFS	353515.61
	Cash		353515.61
b)	SCHEDULE OF BOND PREMIUM AMORTIZATION AND INTEREST REVENUE
	EFFECTIVE INTEREST METHOD
	Date	Cash received	Interest revenue	Premium amortized	Carrying amount
	1/1/2017				353515.61
	12/31/2017	36080.00	31816.40	4263.60	349252.01
	12/31/2018	36080.00	31432.68	4647.32	344604.70
	12/31/2019	36080.00	31014.42	5065.58	339539.12
	12/31/2020	36080.00	30558.52	5521.48	334017.64
	12/31/2021	36080.00	30062.36	6017.64	328000.00
	JOURNAL ENTRIES:
	Cash	36080.00
	Debt investments-AFS		4263.60
	Interest revenue (353515.61*11%)		31816.40
	Fair value adjustment-AFS	2147.99
	Unrealized holding gain or loss-Equity (351400-349252.01)		2147.99
c)	Unrealized holding gain or loss-Equity	9752.69
	Fair value adjustment		9752.69
	CALCULATION FOR FAIR VALUE ADJUSTMENT (12/31/2018)
	Amortized cost	344604.70
	Fair value	337000.00
	Unrealized holding gain or loss	-7604.70
	Already adjusted	-2147.99
	Fair value adjustement for 2018	-9752.69