Question

On January 1, 2017, Bridgeport Company purchased 11% bonds, having a maturity value of $274,000, for $295,314.87. 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. Bridgeport 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		$293,000		2020		$284,700
2018		$283,700		2021		$274,000
2019		$282,800

(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

			Journal Entries
		Date	Account Title	Debit	Credit
	a	1-Jan-17	Debt Investment	$295,314.87
			cash		$295,314.87
			to record the purchase of bonds
	b	31-Dec-17	Interest receivable-274000*11%	$30,140
			Debt Investment-30140-(295314.87*9%)		$3,562
			Interest Revenue-plug		$26,578
			to record the interest revenue
			Fair Value Adjustment	$1,247.13
			Unrealized holding gain on loss -Equity		$1,247.13
			(295314.87-3562)-293000
			to record recognition of fair value
	c	31-Dec-17	Unrealized holding gain on loss -Equity	$256,159.50
			Fair Value Adjustment		$256,159.50
			to record recognition of fair value
	Fair Value Adjustment
	Amortized value	Fair Value	Unrealised Holding gain/Loss
	$28,787.63	$283,700	($254,912.37)
	Add 2017 fair Value Adj		($1,247.13)
	Fair value adj 2018		($256,159.50)
	A	B=FV*Rate	C=F*Rate	D=B-C		F=F-D
	Date	Interest Rec -11%	Interest Recog -9%	Premium Amortization	Premium Unamortized	Carrying Value
	1-Jan				$21,314.87	$295,314.87
	2017	$30,140	$26,578	$3,562	$17,752.87	$291,752.87
	2018	$30,140	$26,257.76	$3,882.24	$13,870.63	$287,870.63
	2019	$30,140	$25,908.36	$4,231.64	$9,638.98	$283,638.98
	2020	$30,140	$25,527.51	$4,612.49	$5,026.49	$279,026.49
	2021	$30,140	$25,112.38	$5,027.62	$1.12	$273,998.88
	Note:The difference in the carrying value is due to approximation.