Question

On 10-01-18, Barn Company purchased 50 of Pottery Company’s $1,000, 3% bonds for $49,200. The Pottery Company bonds were dated 10-01-18 and will mature on 10-01-21. Barn will receive interest every April 1 and October 1. On 08-01-20, Barn sold the bonds at 103 plus interest. The Pottery Company’s bonds are Barn’s only investment in bonds. Barn classified the bonds as an available-for-sale investment. Barn closes it books every 12-31.

The bonds were trading at the following amounts as of the following dates:

• 12-31-18 98

• 12-31-19 102

Prepare the entries B should make on:

a. 10-01-18.

b. 12-31-18.

c. 04-01-19.

d. 10-01-19.

e. 12-31-19.

f. 04-01-20.

g. 08-01-20.

Answer 1

Journal Entries in the books of Pottery Co.
Date	Particulars	Note	Debit	Credit
10.01.2018	available for sale Bonds A/c Dr		49200
To Bank A/c			49200
( Being $1000 3%Bonds purchased 50 @984 each)
12.31.2018	Interest accrued but not due A/c	1	375
	To Interest A/c			375
	( Being the interest recognised for 3 months)
	Loss on available for sale bonds A/c Dr(Other comprehensive income)	2	200
	To Availble for sale bonds A/c			200
	( Being the loss on bonds recognised)
04.01.2019	Bank A/c Dr		750
	To Interest accrued but not due A/c			375
	To interest A/c			375
	( Being the interest amount received)
10.01.2019	Bank A/c Dr	1	750
	To interest A/c			750
	( Being the interest amount received)
12.31.2019	available for sale Bonds A/c Dr	2	2000
	To Loss on available for sale bonds A/c Dr(Other comprehensive income)			200
	To Gain on Available for sale bonds A/c (other comprehensive income)			1800
	( Being the gain recognised in OCI)
	Interest accrued but not due A/c	1	375
	To Interest A/c			375
	( Being the interest recognised for 3 months)
04.01.2020	Bank A/c Dr		750
	To Interest accrued but not due A/c			375
	To interest A/c			375
	( Being the interest amount received)
08.01.2020	Bank A/c Dr		51875
	To interest			375
	To available for sale bonds A.c			51000
	To Gain on Available for sale bonds A/c (other comprehensive income)			500
	( Being the Bonds sold)
08.01.2020	Gain on Available for sale bonds A/c (other comprehensive income)		2300
	To P&L A/c			2300
	( Being the Gain transferred to income statement)
Note:Thus we can see when an Available for Sale investment is classified under the AFS category; any unrealized gain or loss is reported in the Other Comprehensive Income as shown above in the case of ABC Bank. Once the same is realized on the sale of such securities is reported in the Income Statement.

Note 1: Computation of interest
Date	No. of months	Interest rate	Principle amount	Amount
31.12.2018	3	3%	50,000.00	375
04.01.2019	3	3%	50,000.00	375
10.01.2019	6	3%	50,000.00	750
04.01.2020	3	3%	50,000.00	375
08.01.2020	3	3%	50,000.00	375
	Note 2 Computation of loss/ gain on investment
	10.01.2018	12.31.2018	(Loss)/Gain P U	Total
	984	980	4	200
	12.31.2018	12.31.2018	(Loss)/Gain P U	Total
	980	1020	40	2000