Question

Presented below is an amortization schedule related to Tamarisk Company’s 5-year, $180,000 bond with a 6% interest rate and a 3% yield, purchased on December 31, 2015, for $204,731.

Date		Cash Received		Interest Revenue		Bond Premium Amortization		Carrying Amount of Bonds
12/31/15								$204,731
12/31/16		$10,800		$6,142		$4,658		200,073
12/31/17		10,800		6,002		4,798		195,275
12/31/18		10,800		5,858		4,942		190,333
12/31/19		10,800		5,710		5,090		185,243
12/31/20		10,800		5,557		5,243		180,000

The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end:

		12/31/16		12/31/17		12/31/18		12/31/19		12/31/20
Amortized cost		$200,073		$195,275		$190,333		$185,243		$180,000
Fair value		$199,500		$197,300		$192,200		$186,200		$180,000

(a)		Prepare the journal entry to record the purchase of these bonds on December 31, 2015, assuming the bonds are classified as held-to-maturity securities.
(b)		Prepare the journal entry related to the held-to-maturity bonds for 2016.
(c)		Prepare the journal entry related to the held-to-maturity bonds for 2018.
(d)		Prepare the journal entry to record the purchase of these bonds, assuming they are classified as available-for-sale.
(e)		Prepare the journal entries related to the available-for-sale bonds for 2016.
(f)		Prepare the journal entries related to the available-for-sale bonds for 2018.

(Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Answer 1

Formula sheet

A	B	C	D	E	F	G	H	I
2
3
4		A held to maturity investment is made by a company which it intends to hold till maturity of the investment.
5		A held to maturity investment is reported on balance sheet at its amortized cost.
6
7		Available for sale investments is reported at fair value and the unrealized gain or loss is
8		reported in unrealized holding gain or loss (a component of equity) and Fair value Adjustment (Contra Asset Account).
9
10		Date	Cash	Interest	Bond Premium	Carrying Amount
11			Received	Revenue	Amortization	of Bonds
12		42369				204731
13		42735	10800	=G12*(3%)	=D13-E13	=G12-F13
14		43100	10800	=G13*(3%)	=D14-E14	=G13-F14
15		43465	10800	=G14*(3%)	=D15-E15	=G14-F15
16		43830	10800	=G15*(3%)	=D16-E16	=G15-F16
17		44196	10800	=G16*(3%)	=D17-E17	180000
18
19			42735	43100	43465	43830	44196
20		Amortized cost	=G13	=G14	=G15	=G16	=G17
21		Fair value	199500	197300	192200	186200	180000
22
23
24		a)
25		Journal entry for investment in held to maturity investment:
26		Transaction	General Journal	Debt	Credit
27		a	Investment in Bonds-HTM	=G12
28			Cash		=E27
29
30		b)
31		Journal Entry in 2016:
32		Transaction	General Journal	Debt	Credit
33		b	Cash	=D13
34			Interest Income		=E13
35			Investment in Bonds-HTM		=F13
36
37		c)
38		Journal Entry in 2017:
39		Transaction	General Journal	Debt	Credit
40		b	Cash	=D14
41			Interest Income		=E14
42			Investment in Bonds-HTM		=F14
43
44
45		d)
46		Journal entry for investment in Bonds
47		Transaction	General Journal	Debt	Credit
48		d	Investment in Bonds-AFS	=G12
49			Cash		=E48
50
51		e)
52		Journal Entry in 2016:
53		Journal Entry for interest income
54		Transaction	General Journal	Debt	Credit
55		e	Cash	=D13
56			Interest Income		=E13
57			Investment in Bonds-AFS		=E55-F56
58
59		Journal for fair value adjustment:
60		Transaction	General Journal	Debt	Credit
61		e	Fair Value Adjustment (AFS)		=E62
62			Unrealized holding gain or loss	=D20-D21
63
64
65		f)
66		Journal Entry in 2018:
67		Journal Entry for interest income
68		Transaction	General Journal	Debt	Credit
69		f	Cash	=D14
70			Interest Income		=E14
71			Investment in Bonds-AFS		=E69-F70
72
73		Journal for fair value adjustment:
74		Transaction	General Journal	Debt	Credit
75		f	Fair Value Adjustment (AFS)	=F21-F20
76			Unrealized holding gain or loss		=E75
77