Question

Question Help Herkimer Quiroz Associates acquired $7,570,000 par value, 4%, 20-year bonds on their date of issue, January 1 of the current year. i (Click the icon to view additional information.) Requirement Prepare the fair value adjustment journal entries at the end of the second and third years after the acquisition of the investment assuming that the fair value of the bonds is equal to $5,120.000 at the end of year 2 and $505,860 at the end of year three. (Round your intermediary and final answers to the nearest whole dollar Record debits first, then credits. Exclude explanations from any journal entries) Prepare the journal entry required to record the fair value adjustment at the end of Year 2 December 31, Account Year 2

Answer 1

	Herkimer Quiraz Associates acquited $ 7570000
	par Value 4% - 20 year Bond
	The market rate at the time of issue @18%
	Interest paid on Semi annually on June 30 , Dec 31
	Quiroz uses the effective Interest rate
	The fair value of the Bond- Acquisition $5197200
	Interest =9% ( 18%/2)
	Time period =20 Year * 2= 40 years
	We need to calculate present Value of Bond purchsed at 4% with Value $ 7570000
1	0.92	0.09
2	0.84		Present Value		Amnt($)	Discount Factor	Value ( present )$
3	0.77		Interest -		1,51,400	10.7573602	16,28,664
4	0.71		value at maturity		75,70,000	0.0318	2,41,010
5	0.65		Bond Price - present Value				18,69,675
6	0.60
7	0.55		( Discount factor at 40th year			75,70,000
8	0.50		Interest - Calculation
9	0.46		Face Value as above $
10	0.42		Interest Rate =4%			1,51,400
11	0.39		Semi Annual Interest Rate =4%/2= 2%
12	0.36		Interest rate $ =2%*7570000
13	0.33		Discount Factor ( as calculated below)	Sum of Annuity- Discount factor
14	0.30
15	0.27		Journal Entries
16	0.25		Details		Debit($)	Credit($)
17	0.23		Investment in Bond		75,70,000
18	0.21		Cash			18,69,675
19	0.19		Bond Investment - Discount			57,00,325
20	0.18		( accounted Purchased of Bind at Discounted)
21	0.16		Interest amount accounted = June 30th an Dec 31st
22	0.15		date	Details		Debit($)	Credit($)
23	0.14		June 30	cash		1,51,400
24	0.13			Bond Investment - Discount		16,871
25	0.12			Interest Revenue			1,68,271
26	0.11			9%* $ 1869675)
27	0.10		( accounted Interest semi annually + Amortization of bond)
28	0.09		Dec 31	cash		1,51,400
29	0.08			Bond Investment - Discount		18,389
30	0.08			Interest Revenue			1,69,789
31	0.07			( 9% *($1869675+16871)
32	0.06		( accounted Interest semi annually + Amortization of bond)
33	0.06		Finally We need to account - Facir value adjustment movement
34	0.05		The fair value of the Bond- Acquisition $				51,97,200
35	0.05		Bond Investment -Price + Discount amortization
36	0.04		adjustment
37	0.04		Bond Price - present Value			18,69,675
38	0.04		Add- Discount Bond - Amortized
39	0.03		( as calculated above )			16,871
40	0.03					18,389	19,04,935
Total	10.76		fair Value of Adjustment				32,92,265
			Final Journal Entry
			date	Details		Debit($)	Credit($)
			Dec 31	Fair Value Adjustment		32,92,265
				Unrealized Gain / loss - OCI			32,92,265
			( Final adjustment of movement of Fair value transfer to OCI)