Question

On January 1, 2017, Carla Company purchased 11% bonds, having a maturity value of $274,000, for $295,314.87. The bonds provide the bondholders with a 9% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Carla 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		$293,000		2020		$284,700
2018		$283,700		2021		$274,000
2019		$282,800

(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.

(Round answers to 2 decimal places, e.g. 2,525.25. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.	Date	Account Titles and Explanation	Debit	Credit
(a)	choose a transaction date Jan. 1, 2017Dec. 31, 2017Dec. 31, 2018	enter an account title to record transaction A	enter a debit amount	enter a credit amount
		enter an account title to record transaction A	enter a debit amount	enter a credit amount
(b)	choose a transaction date Jan. 1, 2017Dec. 31, 2017Dec. 31, 2018	enter an account title to record interest received	enter a debit amount	enter a credit amount
		enter an account title to record interest received	enter a debit amount	enter a credit amount
		enter an account title to record interest received	enter a debit amount	enter a credit amount
		(To record interest received)
		enter an account title to record fair value adjustment	enter a debit amount	enter a credit amount
		enter an account title to record fair value adjustment	enter a debit amount	enter a credit amount
		(To record fair value adjustment)
(c)	choose a transaction date Jan. 1, 2017Dec. 31, 2017Dec. 31, 2018	enter an account title to record transaction C	enter a debit amount	enter a credit amount
		enter an account title to record transaction C	enter a debit amount	enter a credit amount

Answer 1

No.	Date	Account Titles and Explanation	Debit	Credit
(a)	Jan. 1, 2017	Debt investment	295314.87
		Cash		295314.87
(b)	Dec. 31, 2017	Interest receivable ($274000 x 11%)	30140.00
		Debt investment		3561.66
		Interest revenue ($295314.87 x 9%)		26578.34
		(To record interest received)
		Fair value adjustment	1246.79
		Unrealized holding gain or loss-equity		1246.79
		(To record fair value adjustment)
(c)	Dec. 31, 2018	Unrealized holding gain or loss-equity	5417.79
		Fair value adjustment		5417.79

Working:

Journal entry on Dec. 31, 2018:
Interest receivable ($274000 x 11%)	30140.00
Debt investment		3882.21
Interest revenue ($291753.21 x 9%)		26257.79

Book value on Dec. 31, 2018 = $291753.21 - $3882.21 = $287871

	Amortized Cost	Fair value	Unrealized gain (loss)
Dec. 31, 2017	291753.21	293000	1246.79
Dec. 31, 2018	287871.00	283700	-4171.00
Adjustment required (credit)			5417.79