Question

On January 1, 2017, Sweet Company purchased 13% bonds, having a maturity value of $321,000, for $344,727.36. The bonds provide the bondholders with a 11% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Sweet 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 $342,600 2020 $330,200

2018 $329,400 2021 $321,000

2019 $328,400

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

Part (a)
Date	Accounts and titles	Debit	Credit
2017
1-Jan	Debt investment   Dr	$344,727.36
	To Cash		$344,727.36
Part (b)
Date	Accounts and titles	Debit	Credit
2017
31-Dec	Cash Dr	$41,730
	To Debt investment		$3,809.99
	To Interest revenue		$37,920.01
31-Dec	Fair value adjustment Dr	$1,682.63
	To Unrealized holding gain or loss - income		$1,682.63
* Note :	$342600.00-$340917.37 = $1682.63
Part ( c )
Date	Accounts and titles	Debit	Credit
2018
31-Dec	Unrealized holding gain or loss - income Dr	$8,970.91
	To   Fair value adjustment		$8,970.91
Note:	$329400.00-$336688.28 = ($7288.28+$1682.63) = $8970.91
Note:
	Schedule of interest revenue and bond premium amortization effective interest method
	13% bond sold to yield 11%
Date	Cash received	Interest revenue	Premium amortized	Carrying amount od bonds
1/1/2017				$344,727.36
31/12/2017	$41,730	$37,920.01	$3,809.99	$340,917.37
31/12/2018	$41,730	$37,500.91	$4,229.09	$336,688.28
31/12/2019	$41,730	$37,035.71	$4,694.29	$331,993.99
31/12/2020	$41,730	$36,519.34	$5,210.66	$326,783.33
31/12/2021	$41,730	$35,946.17	$5,783.83	$320,999.50

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