Question

HCB Inc. makes investment in following two bonds during 2020 and classified them as available for sale (AFS): • Bought on April 1, 2020, WC Corp. 8% bonds at a price of $95,000. • Bought on October 1, 2020, AC Corp. 10% bonds at a price of $205,000. The amortized costs and fair values (FV) of these investments at the end of 2020 and 2021 are as follows: Unrealized Gain (loss) Investments WC Corp. bonds, 12/31/2020 AC Corp. bonds, 12/31/2020 WC Corp. bonds 12/31/2021 AC Corp, bonds 12/31/2021 Amortized cost (CV) $96,500 $203,500 $98,000 $ 202,000 FV $101,000 $202,000 $100,000 $ 202,500 On January 5, 2022, HCB Inc. sold the WC Corp. bond investment for a price of $101,000 at which time the amortized cost of the bond was $98,000. FV of AC Corp. bond on December 31, 2022 was $198,000 when the amortized cost of the bond was $200,500 Show all relevant entries for 2020, 2021, and 2022 upto the sale of WC Corp bond investment (ignore the journal entries pertaining to amortization and CV)

Answer 1

Year 2020

Initial Outflow

1/4/2020 Bonds@8% Dr 95000

To Bank 95000

(Being Bonds Purchased)

1/10/2020 Bonds@10% Dr 205000

To Bank 205000

(Being Bond purchased)

31/12/2020 Bonds@8% Dr 6000

To Unrealized Gain 6000

(Being Unrealized gain due to the changes in Fair value recognized)

31/12/2020 Unrealized Loss Dr 3000

To 10% Bonds 3000

(Being Unrealized loss recognized due to change in Fair Value)

31/12/2021   Unrealized Loss Dr 1000

To 8% Bonds 1000

(Being Unrealized loss is recognized due to change in fair value)

31/12/2021 10% Bonds Dr 500

To Unrealized Gain 500

(Being Unrealized gain recognized due to change in fair value)

On the event of Sale:

05/01/2022 Bank Account Dr 101000

To 8% Bonds 95000

To unrealized gain sale of Bonds 5000

To Gain on sale of Bonds 1000

( Being Bonds sold)

31/12/2020 Bank Account Dr 198000

Unrealized loss on Bonds Dr 2500

Loss on sale of Bonds Dr 4500

To 10% Bonds 205000

(Being Bonds Sold)