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Recording Entries for AFS Debt Securities— Effective Interest Method On January 1, 2020, Jules Company purchased...
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 |
Solutions
Expert Solution
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 |
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