Question

On January 1, 2017, Pronghorn Company purchased $280,000, 6% bonds of Aguirre Co. for $257,289. The bonds were purchased to yield 8% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2022. Pronghorn Company uses the effective-interest method to amortize discount or premium. On January 1, 2019, Pronghorn Company sold the bonds for $258,816 after receiving interest to meet its liquidity needs. Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available-for-sale. (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.) Date Account Titles and Explanation Debit Credit Jan. 1, 2017 Prepare the amortization schedule for the bonds. (Round answers to 0 decimal places, e.g. 1,250.) Schedule of Interest Revenue and Bond Discount Amortization—Effective-Interest Method Bonds Purchased to Yield Date Interest Receivable Or Cash Received Interest Revenue Bond Discount Amortization Carrying Amount of Bonds 1/1/17 $ $ $ $ 7/1/17 1/1/18 7/1/18 1/1/19 7/1/19 1/1/20 7/1/20 1/1/21 7/1/21 1/1/22 Total $ $ $ (c) Prepare the journal entries to record the semiannual interest on (1) July 1, 2017, and (2) December 31, 2017. (d) If the fair value of Aguirre bonds is $260,816 on December 31, 2018, prepare the necessary adjusting entry. (Assume the fair value adjustment balance on January 1, 2017, is a debit of $3,620.) (e) Prepare the journal entry to record the sale of the bonds on January 1, 2019. (Round answers to 0 decimal places, e.g. 2,500. 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.) No. Date Account Titles and Explanation Debit Credit (c) (1) July 1, 2017 (2) Dec. 31, 2017 (d) Dec. 31, 2018 (e) Jan. 1, 2019

Answer 1

a)	Date	Account Titles and Explanation	Debit	Credit
	Jan. 1, 2017	Debt Investments (available-for-sale)	$           257,289
		Cash		$           257,289
b)	Schedule of Interest Revenue and Bond Discount
	Amortization—Effective-Interest Method
	6% Bonds Purchased to Yield 8%
	Date	Interest	Interest	Discount	CarryingAmount of
		received (280000 x 6% x 1/2)	income (CV x 8% x 1/2)	Amortization	Bonds
		A	B	C = B-A
	1/1/2017				$     257,289
	7/1/2017	$                                               8,400	$        10,292	$          1,892	$     259,181
	1/1/2018	$                                               8,400	$        10,367	$          1,967	$     261,148
	7/1/2018	$                                               8,400	$        10,446	$          2,046	$     263,194
	1/1/2019	$                                               8,400	$        10,528	$          2,128	$     265,321
	7/1/2019	$                                               8,400	$        10,613	$          2,213	$     267,534
	1/1/2020	$                                               8,400	$        10,701	$          2,301	$     269,836
	7/1/2020	$                                               8,400	$        10,793	$          2,393	$     272,229
	1/1/2021	$                                               8,400	$        10,889	$          2,489	$     274,718
	7/1/2021	$                                               8,400	$        10,989	$          2,589	$     277,307
	1/1/2022	$                                               8,400	$        11,092	$          2,693	$     280,000
				$        22,711
c)	Date	Account Titles and Explanation	Debit	Credit
	Jul 1, 2017	Cash	8400
		Debt Investments (available-for-sale)	1892
		Interest Revenue		10292
	Dec 31, 2017	Interest Receivable	8400
		Debt Investments (available-for-sale)	1967
		Interest Revenue		10367
d)	December 31, 2018 (adjustment):
			Available-for-Sale Investment Cost	Fair Value	Unrealized Gain (Loss)
		Aguirre (total portfolio value)	*	$      260,816	$        (4,505)
			$      265,321
		Previous fair value adjustment—Dr.			$         3,620
		Fair value adjustment—Cr.			$        (8,125)
	Dec 31, 2018	Unrealized Holding Gain or Loss	$          8,125
		Fair Value Adjustment=AFS		$          8,125
e)		Selling price	$      258,816
		Less: Amortized cost	265,321
		Realized loss on sale of investment	$        (6,505)
		(available-for-sale)
	Jan 1, 2019	Cash	$      258,816
		Loss on Sale of Investments	$          6,505
		Debt Investments (available-for-sale)		$      265,321