Question

On January 1, 2020, Riverbed Company purchased 12% bonds, having a maturity value of $276,000 for $296,924.88. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest received on January 1 of each year. Riverbed 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. 2020 $294,800 2023 $286,100 2021 $285,000 2024 $276,000 2022 $284,100 (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 2020. (c) Prepare the journal entry to record the recognition of fair value for 2021.

Answer 1

Answer
Journal Entry
a)
No.	Account titles and explanation	Debit	Credit
01-01-2020	Debt Investment	$2,96,924.88
	To, Cash		$2,96,924.88
	(To record the purchase of bonds at premium)
	(To record the purchase of bonds at premium)
b)
31-12-2020	Interest receivables ($276,000*12%)	$   33,120.00
	To Debtinvestment		$     3,427.51
	To Interest revenue ($296,924.88*10%)		$   29,692.49
	(To record interest revenue and premium amortization)
31-12-2020	Fair value adjustment Dr ($294,800 + $3,427.51 - $296,924.88)	$     1,302.63
	To Unrealized holding gain or loss - OCI		$     1,302.63
	(To record adjustment to fair value of investment)
c)
31-12-2021	Interest receivables ($276,000*12%)	$   33,120.00
	To Debtinvestment		$     3,770.26
	To Interest revenue ($296,924.88*10%)		$   29,349.74
31-12-2021	Unrealized holding gain or loss - OCI	$6,029.74
	To Fair value adjustment ($294,800 - $3,770.26 - $285,000)		$6,029.74
	(To record adjustment to fair value of investment)