Question

On January 1, 2017, Carla Company purchased 11% bonds, having a maturity value of $274,000, for $295,314.87. The bonds provide the bondholders with a 9% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Carla Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale category. The fair value of the bonds at December 31 of each year-end is as follows.

2017		$293,000		2020		$284,700
2018		$283,700		2021		$274,000
2019		$282,800

(a)		Prepare the journal entry at the date of the bond purchase.
(b)		Prepare the journal entries to record the interest revenue and recognition of fair value for 2017.
(c)		Prepare the journal entry to record the recognition of fair value for 2018

Answer 1

Answer:-

no	Date	Accounts & explanation	Debit	Credit
a).	January 1, 2017	Debt investments	$295,314.87
		Cash		$295,314.87
		(Record purchase of bond )
b).	December 31 ,2017	Cash	=  $274,000 * 11% = $30140
		Interest revenue		= $295,314.87 * 9% = $26,578.3383
		Debt investments		= $30140 - $26,578.3383 = $3,561.66
		( Record interest received)
		Fair value adjustment	= $293,000 - ($295,314.87 - $3,561.66) = 293,000 - 291,753.21 = $1,246.79
		Unrealized holding gain		$1,246.79
		(Record recognition of fair value)
c).	December 31,2018	Un realized holding gain or loss	= [($283,700 - $290,788.531 ) + $1,246.79] = $ 5841.741
		Fair value adjustment		= $ 5841.741
		( record recognition of fair value)

Date	Cash received	Interest revenue	Premium amortized	Carrying value
January 1 ,2018				$295,314.87
December 31,2018	$30140	$26,578.3383	$3,561.66	= $295,314.87 - $3,561.66 = $291,753.21
December 31,2018	$30140	=  $291,753.21 * 10% = $ 29,175.321	= $30140 - $ 29,175.321 =$964.679	= $291,753.21 - $964.679 = $290,788.531
December 31,2018	$30140	$29,078.85	= $30140 - $29,078.85 = $1,061.15	=  $290,788.531 -  1,061.15 = $ 289,727.381