Question

On January 1, 2020, Swifty Company purchased 11% bonds, having a maturity value of $289,000 for $311,481.74. 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. Swifty 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		$309,400		2023		$299,100
2021		$297,900		2024		$289,000
2022		$296,900

(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.

Answer 1

(a)	Date	General Journal	Debit	Credit
	Jan. 1, 2020	Debt investments	311481.74
		Cash		311481.74
		(To record the bond purchase)
(b)	Dec. 31, 2020	Interest receivable ($289000 x 11%)	31790
		Interest revenue ($311481.74 x 9%)		28033.36
		Debt investments		3756.64
		(To record interest)
	Dec. 31, 2020	Fair value adjustment [$309400 - ($311481.74 - $3756.64)]	1674.90
		Unrealized holding gain or loss-equity		1674.90
		(To record fair value adjustment)
(c)	Dec. 31, 2021	Unrealized holding gain or loss-equity	7405.26
		Fair value adjustment		7405.26
		(To record fair value adjustment)

Working:

Carrying value on Dec. 31, 2020 = $311481.74 - $3756.64 = $307725.10

Amortization during 2021 = $31790 - ($307725.10 x 9%) = $31790 - $27695.26 = $4094.74

Carrying value on Dec. 31, 2021 = $307725.10 - $4094.74 = $303630.36

Fair value adjustment balance required = $303630.36 - $297900 = $5730.36 (credit)

Existing fair value adjustment balance = $1674.90 (debit)

Adjustment required = $1674.90 + $5730.36 = $7405.26 (credit)

Answer 2

d)

Cash                                                               Dr. amount received

Loss (or gain) on Disposal - amortized cost   Dr. amount received - carrying amount

        Bond Investment at amortized cost                                    Cr. Carrying amount 

(Credit disposal if it is a gain)