Question

Recording Entries for AFS Debt Securities— Effective Interest Method

On January 1, 2020, Jules Company purchased for cash, $95,000 bonds (nineteen $5,000 bonds) of Android Corporation at a market rate of 6%. The bonds pay 6.5% interest, payable on a semiannual basis each June 30 and December 31, and mature on December 31, 2024. The bonds are classified as available-for-sale securities. The annual reporting period of Jules Company ends December 31. Assume the effective interest method of amortization of any discounts or premiums.

• Amortization Schedule
• Journal Entries for 2020
• Financial Statement Presentation

b. Record the entry for the purchase of the bonds by Jules Company on January 1, 2020.

c. Record the entry for the receipt of interest on June 30, 2020.

d. Record the entry for the receipt of interest on December 31, 2020.

e. Record the adjusting entry on December 31, 2020, to adjust the debt investment to fair value. The fair value of the bonds on December 31, 2020, was $93,100.

Note: List multiple debits or credits (when applicable) in alphabetical order.

Note: Round each amount to the nearest whole dollar.

	Date	Account Name	Dr.	Cr.
b.	Jan. 1, 2020	AnswerCashInterest ReceivableInvestment in TSFair Value Adjustment--TSInvestment in AFS SecuritiesFair Value Adjustment--AFSInvestment in HTM SecuritiesInvestment in StockFair Value Adjustment--Equity SecuritiesFair Value Adjustment--Fair Value OptionAllowance for Credit LossesAccumulated Other Comprehensive IncomeUnrealized Gain or Loss--OCIUnrealized Gain or Loss--IncomeDividend RevenueInterest RevenueInvestment IncomeLoss on ImpairmentRecovery of Loss on ImpairmentLoss on Sale of InvestmentGain on Sale of InvestmentN/A	Answer	Answer
		AnswerCashInterest ReceivableInvestment in TSFair Value Adjustment--TSInvestment in AFS SecuritiesFair Value Adjustment--AFSInvestment in HTM SecuritiesInvestment in StockFair Value Adjustment--Equity SecuritiesFair Value Adjustment--Fair Value OptionAllowance for Credit LossesAccumulated Other Comprehensive IncomeUnrealized Gain or Loss--OCIUnrealized Gain or Loss--IncomeDividend RevenueInterest RevenueInvestment IncomeLoss on ImpairmentRecovery of Loss on ImpairmentLoss on Sale of InvestmentGain on Sale of InvestmentN/A	Answer	Answer
c.	June 30, 2020	AnswerCashInterest ReceivableInvestment in TSFair Value Adjustment--TSInvestment in AFS SecuritiesFair Value Adjustment--AFSInvestment in HTM SecuritiesInvestment in StockFair Value Adjustment--Equity SecuritiesFair Value Adjustment--Fair Value OptionAllowance for Credit LossesAccumulated Other Comprehensive IncomeUnrealized Gain or Loss--OCIUnrealized Gain or Loss--IncomeDividend RevenueInterest RevenueInvestment IncomeLoss on ImpairmentRecovery of Loss on ImpairmentLoss on Sale of InvestmentGain on Sale of InvestmentN/A	Answer	Answer
		AnswerCashInterest ReceivableInvestment in TSFair Value Adjustment--TSInvestment in AFS SecuritiesFair Value Adjustment--AFSInvestment in HTM SecuritiesInvestment in StockFair Value Adjustment--Equity SecuritiesFair Value Adjustment--Fair Value OptionAllowance for Credit LossesAccumulated Other Comprehensive IncomeUnrealized Gain or Loss--OCIUnrealized Gain or Loss--IncomeDividend RevenueInterest RevenueInvestment IncomeLoss on ImpairmentRecovery of Loss on ImpairmentLoss on Sale of InvestmentGain on Sale of InvestmentN/A	Answer	Answer
		AnswerCashInterest ReceivableInvestment in TSFair Value Adjustment--TSInvestment in AFS SecuritiesFair Value Adjustment--AFSInvestment in HTM SecuritiesInvestment in StockFair Value Adjustment--Equity SecuritiesFair Value Adjustment--Fair Value OptionAllowance for Credit LossesAccumulated Other Comprehensive IncomeUnrealized Gain or Loss--OCIUnrealized Gain or Loss--IncomeDividend RevenueInterest RevenueInvestment IncomeLoss on ImpairmentRecovery of Loss on ImpairmentLoss on Sale of InvestmentGain on Sale of InvestmentN/A	Answer	Answer
d.	Dec. 31, 2020	AnswerCashInterest ReceivableInvestment in TSFair Value Adjustment--TSInvestment in AFS SecuritiesFair Value Adjustment--AFSInvestment in HTM SecuritiesInvestment in StockFair Value Adjustment--Equity SecuritiesFair Value Adjustment--Fair Value OptionAllowance for Credit LossesAccumulated Other Comprehensive IncomeUnrealized Gain or Loss--OCIUnrealized Gain or Loss--IncomeDividend RevenueInterest RevenueInvestment IncomeLoss on ImpairmentRecovery of Loss on ImpairmentLoss on Sale of InvestmentGain on Sale of InvestmentN/A	Answer	Answer
		AnswerCashInterest ReceivableInvestment in TSFair Value Adjustment--TSInvestment in AFS SecuritiesFair Value Adjustment--AFSInvestment in HTM SecuritiesInvestment in StockFair Value Adjustment--Equity SecuritiesFair Value Adjustment--Fair Value OptionAllowance for Credit LossesAccumulated Other Comprehensive IncomeUnrealized Gain or Loss--OCIUnrealized Gain or Loss--IncomeDividend RevenueInterest RevenueInvestment IncomeLoss on ImpairmentRecovery of Loss on ImpairmentLoss on Sale of InvestmentGain on Sale of InvestmentN/A	Answer	Answer
		AnswerCashInterest ReceivableInvestment in TSFair Value Adjustment--TSInvestment in AFS SecuritiesFair Value Adjustment--AFSInvestment in HTM SecuritiesInvestment in StockFair Value Adjustment--Equity SecuritiesFair Value Adjustment--Fair Value OptionAllowance for Credit LossesAccumulated Other Comprehensive IncomeUnrealized Gain or Loss--OCIUnrealized Gain or Loss--IncomeDividend RevenueInterest RevenueInvestment IncomeLoss on ImpairmentRecovery of Loss on ImpairmentLoss on Sale of InvestmentGain on Sale of InvestmentN/A	Answer	Answer
e.	Dec. 31, 2020	AnswerCashInterest ReceivableInvestment in TSFair Value Adjustment--TSInvestment in AFS SecuritiesFair Value Adjustment--AFSInvestment in HTM SecuritiesInvestment in StockFair Value Adjustment--Equity SecuritiesFair Value Adjustment--Fair Value OptionAllowance for Credit LossesAccumulated Other Comprehensive IncomeUnrealized Gain or Loss--OCIUnrealized Gain or Loss--IncomeDividend RevenueInterest RevenueInvestment IncomeLoss on ImpairmentRecovery of Loss on ImpairmentLoss on Sale of InvestmentGain on Sale of InvestmentN/A	Answer	Answer
		AnswerCashInterest ReceivableInvestment in TSFair Value Adjustment--TSInvestment in AFS SecuritiesFair Value Adjustment--AFSInvestment in HTM SecuritiesInvestment in StockFair Value Adjustment--Equity SecuritiesFair Value Adjustment--Fair Value OptionAllowance for Credit LossesAccumulated Other Comprehensive IncomeUnrealized Gain or Loss--OCIUnrealized Gain or Loss--IncomeDividend RevenueInterest RevenueInvestment IncomeLoss on ImpairmentRecovery of Loss on ImpairmentLoss on Sale of InvestmentGain on Sale of InvestmentN/A	Answer	Answer

Answer 1

Answer might be minor different due to rounding PV factor.

Calculation

Coupon rate per period (6.5%/2)	3.25%
Face value of bond	$          95,000
Market rate per period (6%/2)	3.00%
Interest paid (95000*3.25%)	3,088
Interest paid on	Semi annually
Number of period [2020 to 2024 =5] (5 years*2)	10

Market rate per period used for PV factor.
Market rate per period		3.00%

Period	PV factor	PVA factor
1	0.97087	0.97087
2	0.94260	1.91347
3	0.91514	2.82861
4	0.88849	3.71710
5	0.86261	4.57971
6	0.83748	5.41719
7	0.81309	6.23028
8	0.78941	7.01969
9	0.76642	7.78611
10	0.74409	8.53020

	Amount	Multiply: PV factor	Present value
Face value	95,000.00	0.74409	$          70,689
Interest paid	3,087.50	8.53020	$          26,337
Price of bonds (Total of above)			97,026

Answer A

Period	Date	Cash Interest Receipt	Interest Revenue @ 3%	Decrease in premium	Amortized cost of Bond
0	Jan. 1, 2020				97,026
1	Jun 30, 2020	3,088	2,911	177	96,849
2	Dec 31, 2020	3,088	2,905	183	96,666

Amortized cost of Bond = Previous's period Amortized cost of Bond - Decrease in premium

Interest Revenue = Previous's period Amortized cost of Bond * 3%

Decrease in premium = Cash Interest Receipt - Interest Revenue

Answer B to E

Journal entries
Date	Account title	Debit	Credit
Jan. 1, 2020	Investment in AFS securities	97,026
	Cash		97,026
	(To record Purchase of Bond.)
Jun 30, 2020	Cash	3,088
	Investment in AFS securities		177
	Interest revenue		2,911
	(To record interest received.)
Dec 31, 2020	Cash	3,088
	Investment in AFS securities		183
	Interest revenue		2,905
	(To record interest received.)
Dec 31, 2020	Unrealized Gain or Loss--OCI	3,566
	Fair Value Adjustment--AFS		3,566
	(To record adjustment for Fair Market value.) (Decrease in Value = 96666-93100)

Financial Statement

Balance sheet
Dec 31, 2020
Current assets
Available for sale debt securities			93,100
Long term assets
Not applicable
Stockholder's equity
Accumulated other comprehensive income
Unrealized gain (loss) - other comprehensive income			3,566
Income statement
For the year ended
Other income			5,816
Net income [Interest Revenue] (2911+2905)
Unrealized gain (loss) - other comprehensive income [If the company follows IFRS, considered this also]			3,566
Comprehensive income			9,382