Problem #3 On January 1, 2017, Pedroni Company Purchased $400,000, 8% bonds of Zorzi Company for...

Problem #3

On January 1, 2017, Pedroni Company Purchased $400,000, 8% bonds of Zorzi Company for $369,114. The bonds were purchased to yield to yield 10% interest. Interest is payable semiannualy on July 1 and January 1. The bonds mature on January 1, 2022. Pedroni Company uses the effective-interest method to amortize discount or premium. On January 1, 2019, Pedroni company sold the bonds for $370,726 after receiving interest to meet its liquidity needs.

Instructions:

Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available-for-sale.
Prepare the amortization schedule for the bonds
Prepare the journal entries to record the semiannual interest on July1, 2107 and December 31, 2017
If the fair value of Zorzi bonds is $372,726 on December 31, 2018, prepare the necessary adjusting entry. (Assume the fair value adjustment balance on December 31, 2017, is a debit of $3,375.)
Prepare the journal entry to record the sale of bonds on January 1, 2019.

Expert Solution

Amortization Schedule
Period	Cash paid	Interest	Investment in debt securties	Calculation	Closing bal.
01-01-17	0	$0			$ 369,114
30-06-17	$16,000	$18,456	$2,456	(18455.7-16000)	$ 371,570
31-12-17	$16,000	$18,578	$2,578	(18578.49-16000)	$ 374,148
30-06-18	$16,000	$18,707	$2,707	(18707.41-16000)	$ 376,856
31-12-18	$16,000	$18,843	$2,843	(18842.78-16000)	$ 379,698
30-06-19	$16,000	$18,985	$2,985	(18984.92-16000)	$ 382,683
31-12-19	$4,500	$19,134	$14,634	(19134.22-4500)	$ 397,318
30-06-20	$4,500	$19,866	$15,366	(19865.93-4500)	$ 412,683
31-12-20	$4,500	$20,634	$16,134	(20634.22-4500)	$ 428,818
30-06-21	$4,500	$21,441	$16,941	(21440.93-4500)	$ 445,759
31-12-21	$4,500	$22,288	$17,788	(22287.98-4500)	$ 463,547

Date	Account titles and explanation	Debit	Credit
01-01-17	Investment in debt securities Dr.	$369,114
	Cash				$369,114
	(purchase of debt securities recorded)

30-06-17	Cash			$16,000
	Investment in debt securities	$2,456
	Interest income			$18,456
	(June 30, 2017 interest)

31-12-17	Cash			$16,000
	Investment in debt securities	$2,985
	Interest income			$18,578
	(Dec, 2017 interest)

31-12-18	Fair value adjustment	$3,597
	Investment in debt securities		$3,597
	(To record fair value of investment)
	($379,698-$372,726-$3,375)=$3,597

01-01-19	Cash			$370,726
	Loss on sale		$8,972
	Investment in debt securities Dr.		$ 372,726
	Fair value adjustment		$ 6,972
	(To record sale of investment)

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