Question

On January 1, 2017, Crane Company purchased 12% bonds, having a maturity value of $304,000, for $327,047.70. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Crane 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		$324,800		2020		$313,800
2018		$312,700		2021		$304,000
2019		$311,800

(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

	(a) Journal Entries of Bond Purchase are as follows:-
Date	Account Title	Debit	Credit
1/1/2017	Debt Investments	$        327,047.70
	To Cash		$         327,047.70
	(b)To record interest revenue
31/12/2017	Interest Receivable	$          36,480.00
	Debt Investment		$             3,775.23
	Interest Revenue		$           32,704.77
	(b) To Record Fair Value Adjustment for 31 Dec 2017 :-
31/12/2017	Fair Value Adjustment (Available-for-Sale)	$            1,527.53
	To Unrealized Holding Gain or Loss-Equity		$             1,527.53
	=((327047.7-3775.23)-324800)
	(c) To Record Fair Value Adjustment for 31 Dec 2018 :-
31/12/2018	Unrealized Holding Gain or Loss-Equity	$            7,947.25
	To Fair Value Adjustment (Available-for-Sale)		$             7,947.25
	(Working Note)

Book value at December 31, 2017	$        323,272.47
Less: Premium Amortized =(304000*12%)-(327047.7-3775.23)*10%	$            4,152.75
Book Value at December 31, 2018	$        319,119.72
Fair Value at December 31, 2018	$        312,700.00
Accumulated unrealized loss	$            6,419.72
Add: Unrealized gain already recognized	$            1,527.53
Unrealized loss to be recognized in 20188	$            7,947.25