Question

Please Provide me with the CORRECT Soulation to this practice problem. THIS IS GRADED.THANK YOU.

On July 1 2017 a company purchased a $20,000, 9% bond as an available for sale investment. The bond will mature in 10 years and pays interest annually on June 30. The bond was purchased for 21,342. Because the current market rate 8%. The bond had a market value of 22,000 on December 31, 2017. The company uses the effective entry method.

A. provide July 1 2017 journal entries to record the purchase.

B.WRITE the adjusting entry(ies) that should be made on December 31, 2017 end of the fiscal year.

Answer 1

Solution:

The available for sale investments are carried on balance sheet AT THEIR FAIR VALUE and any change between two reporting dates is taken to the shareholders’ equity as a separate component which is called ‘Change in Fair Value of Available for Sale Investment”.

The journal entries will be as follows:

A. July 1 2017 journal entries to record the purchase

Date	General Journal	Debit	Credit
July.1, 2017	Available for Sale Investments (Debt Security) – Par Value	$20,000
	Interest Receivable ($21,342 – 20,000)
	Cash		$21,342

B. Adjusting entry(ies) that should be made on December 31, 2017 end of the fiscal year.

First entry we will pass to record the Interest Income.

Date	General Journal	Debit	Credit
Dec.31, 2017	Cash (Par Value 20,000*9%*6/12)	$900
	Interest Income (Carrying Value of Investment $21,342*Market Interest Rate 8%*6/12)		$854
	Interest Receivable		$46

Second Entry to record the Available for Sale Investment at Fair Value

Carrying Value as on Dec 31, 2017 = Cost of Purchase of Investment – Amortization of Interest Receivable

= $21,342 – 46

= $21,296

Unrealized Gain / (loss) – Other Comprehensive Income Account = Fair Value at Dec 31 – Carrying value

= $22,000 - $21,296

= $704

Date	General Journal	Debit	Credit
Dec.31, 2017	Available for Sale Investment	$704
	Unrealized Gain - Other Comprehensive Income Account		$704
	(to record the investment at Fair value)

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