Question

On December 31, 2015, ABC Company issued $170,000 par of a 7% interest rate and a 4% yield for $192,705, which were purchased by DEF Company. Interest is received yearly on December 31. The effective interest method is used for any premium or discount to be amortized by the investor. Presented below is an amortization schedule prepard by DEF Company related to this debt investment in ABC Company’s bonds.

Date	Cash Received	Interest Revenue	Bond Premium Amortization	Carrying Amount of Bonds
12/31/15				1
12/31/16	11,900	$7,708	$4,192	188,513
12/31/17	2	3	4	5
12/31/18	11,900	7,366	4,534	179,620
12/31/19	11,900	7,185	4,715	174,905
12/31/20	11,900	6,995	4,905	170,000

The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.

	12/31/2016	12/31/2017	12/31/2018	12/31/2019	12/31/2020
Amortized cost	$188,513	$184,154	$179,620	$174,905	170,000
Fair value	$187,900	186,300	$181,400	$176,000	$170,000

(a) Use the effective-interest method for discount or premium amortization to determine the

missing amount in the bond amortization schedule above: (1),  (2),  (3), (4), and  (5).

1, Carrying amount of bonds at beginning=Issue price of the bond=$ 192705

2,   Cash received=$ 11900

3, Interest revenue=Previous carrying amount*Yield=188513*4%=7540.52=$ 7541

4, Bond premium amortization=Cash received-Interest revenue=11900-7541=$ 4359

# 5 , ?

(e) Prepare the journal entry to record the purchase of these bonds on 12/31/15 and all of the relevant journal entries related this debt investments for 2016, assuming the bonds are classified as Held-to-Maturity Securities. ?

(f) Prepare the journal entry to record the purchase of these bonds on 12/31/15 and all of the relevant journal entries related this debt investments for 2016, assuming the bonds are classified as Available-for-Sale Securities. ?

Answer 1

Answer-a(5):

= $188513 - 4359 = $184,154

Answer-(e):

Credit Journal Entry assuming Held-to-maturity bonds: Date Account Name 12/31/2015 Debt investment Cash Debit 192,705 $ 192,705 11,900 12/31/2016 Cash Interest revenue Debt investment 7,708 4,192

Answer-(f):

Debit Credit Journal Entry assuming available-for-sale securities: Date Account Name 12/31/2015 Debt investment Cash 192,705 $ 192,705 11,900 12/31/2016 Cash Interest revenue Debt investment 7,708 4,192 613 12/31/2016 Unrealized holding gain or loss - Equity Fair value adjustment 613