On January 1, 2020, Novak Company purchased 13% bonds, having a maturity value of $321,000 for...
On January 1, 2020, Novak 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, 2020, and
mature January 1, 2025, with interest received on January 1 of each
year. Novak 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 |
$342,600 |
2023 |
$330,200 | |||
|---|---|---|---|---|---|---|
|
2021 |
$329,400 |
2024 |
$321,000 | |||
|
2022 |
$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 2020. | |
| (c) | Prepare the journal entry to record the recognition of fair value for 2021. |
Homework Answers
|
Transaction |
Date |
Account titles and explanation |
Debit |
Credit |
|
a |
January 1, 2020 |
Debt Investments (Available-for-Sale) |
344727.36 |
|
|
Cash |
344727.36 |
|||
|
b |
December 31, 2020 |
Cash (321000*13%) |
41730.00 |
|
|
Debt Investments (Available-for-Sale) |
3809.99 |
|||
|
Interest Revenue (344727.36*11%) |
37920.01 |
|||
|
December 31, 2020 |
Fair Value Adjustment (Available-for-Sale) (342600-(344727.36-3809.99)) |
1682.63 |
||
|
Unrealized Holding Gain or Loss—Equity |
1682.63 |
|||
|
c |
December 31, 2021 |
Unrealized Holding Gain or Loss—Equity (329400-345146.50)-1682.63 |
17429.10 |
|
|
Fair Value Adjustment (Available-for-Sale) |
17429.10 |
Amortized cost 2012 = (344727.36-3809.99)-(((344727.36-3809.99)*11%)-41730) = 345146.50
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