On January 1, 2020, Blue Company purchased 11% bonds, having a maturity value of $314,000 for $338,426.53. The bonds provide the bondholders with a 9% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest received on January 1 of each year. Blue 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 $336,200 2023 $323,500 2021 $322,500 2024 $314,000 2022 $321,500 (a) Prepare the journal entry at the date of the bond purchase. (b) Prepare the journal entries to record the interest revenue and recognition of fair value for 2020. (c) Prepare the journal entry to record the recognition of fair value for 2021.
(a) -- Prepare the journal entry at the date of the bond purchase.
Answer -
Date | General journal | Debit ($) | Credit ($) |
January 1, 2020 |
Debt Investments Cash |
338426.53 - |
- 338426.53 |
.
(b) -- Prepare the journal entries to record the interest revenue and recognition of fair value for 2020.
Answer -
Date | General journal | Debit ($) | Credit ($) |
December 31, 2020 |
Cash [$314000 * 11%] Debt Investments [Difference] Interest Revenue [$338426.53 * 9%] |
34540 - - |
- 4081.61 30458.39 |
December 31, 2020 |
Fair Value Adjustment [$336200 - $334344.92] Unrealized Holding Gain or Loss--Equity |
1855.08 - |
- 1855.08 |
.
(c) -- Prepare the journal entry to record the recognition of fair value for 2021.
Answer -
Date | General journal | Debit ($) | Credit ($) |
December 31, 2021 |
Unrealized Holding Gain or Loss--Equity Fair Value Adjustment [($329895.96 - $322500) - $1855.08] |
5540.88 - |
- 5540.88 |
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