Question

 On January 1, 2020, Hi and Lois Company purchased 12% bonds, having a maturity value of $300,000 for $322,744.44. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest received on January 1 of each year. Hi and Lois 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.

 2020 $320,500 2023 $310,000

 2021 $309,000 2024 $300,000

 2022 $308,000

 (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 2020.

 (c) Prepare the journal entry to record the recognition of fair value for 2021.

 (Round answers to 2 decimal places, e.g. 2,525.25. 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

Answer 2

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Answer 3

Answer:

a)

Date	General Journal	Debit	Credit
January 1st 2020	Debt investment (or) investment in Bonds	322,744.72
	Cash		322,744.72
	(being the purchase of bond)

b)

Date	Particulars	Debit ($)	Credit ($)
01/01/2020	Cash	36000
	Debt investment		3725.56
	Interest revenue		32274.44
	(Being the purchase of bond)

Working:
Cash received = Maturity value x rate of yield
=$300000 x 12%
=$36000

c)

Date	Particulars	Debit ($)	Credit ($)
31/12/2020	Debt Investment	36000
	Cash		2000
	Interest revenue		34000
	(Being the purchase of bond)
31/12/2020	Cash	36000
	Debt Investment		4098.11
	Interest revenue		31901.89
	(Being purchase of bond)