Question

On January 1, 2020, Bonita Company purchased $360,000, 8% bonds of Aguirre Co. for $332,201. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2025. Bonita Company uses the effective-interest method to amortize discount or premium. On January 1, 2022, Bonita Company sold the bonds for $333,764 after receiving interest to meet its liquidity needs. Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available-for-sale. (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 O for the amounts.)

Answer 1

Part A

Date	Account titles and explanation	Debit	Credit
Jan. 1, 2020	Debt investment	332201
	Cash		332201

Date	Interest receivable or cash received	Interest	Bond discount amortization	Carrying amount of bonds
1/1/20				332201
7/1/20	14400	16610	2210	334411
1/1/21	14400	16721	2321	336732
7/1/21	14400	16837	2437	339169
1/1/22	14400	16958	2558	341727
7/1/22	14400	17086	2686	344413
1/1/23	14400	17221	2821	347234
7/1/23	14400	17362	2962	350196
1/1/24	14400	17510	3110	353306
7/1/24	14400	17665	3265	356571
1/1/25	14400	17829	3429	360000
Total	144000	171799	27799

360000*8%/2 =14400

Interest = previous carrying amount *10%/2

Bond discount amortization = interest – interest receivable

Carrying amount = previous carrying amount + Bond discount amortization

Part C

Date	Account titles and explanation	Debit	Credit
July 1, 2020	Cash	14400
	Debt investment	2210
	Interest revenue		16610
December 31, 2020	Cash	14400
	Debt investment	2321
	Interest revenue		16721

Part D

Date	Account titles and explanation	Debit	Credit
December 31, 2021	Unrealized Holding Gain or Loss – Equity (2000+3142)	5142
	Fair Value Adjustment (Available-for-Sale)		5142

Unrealized Loss = carrying amount – fair value = 335764-333764 = 2000

Part E

Date	Account titles and explanation	Debit	Credit
Jan. 1, 2022	Cash	333764
	Loss on sale of investments (balancing figure)	7963
	Debt investments		341727