Question

On January 1, 2020, Whispering Winds Limited paid $575,560.90 for 12% bonds with a maturity value of $535,000.00. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2020, and mature on January 1, 2020, with interest receivable on December 31 of each year. Whispering Winds applies ASPE using the effective interest method, and has a December 31 year end. Assume that Whispering Winds hopes to make a gain on the bonds as interest rates are expected to fall. Whispering Winds accounts for the bonds at fair value with changes in value taken to net income, and separately recognizes and reports interest income. The fair value of the bonds at December 31 of each year end is as follows:

2020 $571,600

2021 $551, 050

2022 $548,910

2023 $542,490

2024 $535,000

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

Prepare the journal entries to record interest income and interest received and recognition of fair value as December 31, 2020, 2021, and 2022.

Answer 1

Sollution 1
Date	Accounts Titles & Explanation	Debit	Credit
January 1.2020	Debt Investments A/c Dr	$ 575,560.90
	To Cash A/c		$     575,560.90
	(Being record entered for purchase of 12% bonds and paid through cash)

Sollution 2

Date	Accounts Titles & Explanation	Debit	Credit
December 31,2020	Cash A/c Dr($535000*12%)	$    64,200.00
	Debt Investments A/c		$         6,643.91
	Interest Revenue A/c(575560.90*10%)		$       57,556.09
	(Being entry recorded for Interest income received at December 31, 2020)
December 31,2020	Fair Value NI Investments A/c Dr($571600-($575560.90-6643.91)	$      2,683.01
	Unrealized holding Gain or loss		$         2,683.01
	(Being entry recorded for recognition of fair value
December 31,2021	Cash A/c	$    64,200.00
	Debt Investments A/c		$         7,308.30
	Interest Revenue A/c($575560.90-6643.91)*10%)		$       56,891.70
	(Being entry recorded for Interest income received at December 31, 2021)
December 31,2021	Unrealized holding Gain or loss ($571600-7308.30)-($551050)	$    13,241.70
	Fair Value NI Investments A/c		$       13,241.70
	(Being entry recorded for recognition of fair value
December 31,2022	Cash A/c	$    64,200.00
	Debt Investments A/c		$         8,039.13
	Interest Revenue A/c(568916.99-7308.30)*10%		$       56,160.87
	(Being entry recorded for Interest income received at December 31, 2022)
December 31,2022	Fair Value NI Investments A/c	$      5,899.13
	Unrealized holding Gain or loss ($548910-($551050-8039.13)		$         5,899.13
	(Being entry recorded for recognition of fair value