Question

On January 1, 2017, Grouper Company purchased 12% bonds, having a maturity value of $316000 for $339957.48. 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. 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 Decemeber 31 of each year end is as follows.

2017. $337900. 2020. $326400

2018. $325300. 2021. $316000

2019. $324200

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)

Date	General Journal	Debit	Credit
01/01/2017	Debt Investments (Available-for-Sale)	339,957.48
	Cash		339,957.48

b)

Date	General Journal	Debit	Credit
31/12/2017	Cash	37,920.00
	Debt Investments (Available-for-Sale)		3,924.25
	Interest Revenue (339,957.48 x 10%)		33,995.75

31/12/2017	Fair Value Adjustment (Available-for-Sale)	1,866.77
	Unrealized Holding Gain or Loss-Equity (337,900 - 336,033.23)		1,866.77

c)

31/12/2018	Unrealized Holding Gain or Loss-Equity	8,283.32
	Fair Value Adjustment (Available-for-Sale)		8,283.32

Amortized Cos	Fair Value	unrealized
331,716.55	325,300.00	6,416.55
Previous fair value adjustment		1,866.77
Fair value adjustment		8,283.32