Question

ools View Docu Problem 17-02 On January 1, 2020, Flint Company purchased $440,000, 10% bonds of Aguirre Co. for $407,614. The bonds were purchased to yield 12% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2025. Flint Company uses the effective interest method to amortize discount or premium. On January 1, 2022, Flint Company sold the bonds for $409,094 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 thes and enter for the amounts.) Account Titles and Explanation Debit Credit Date Jan. 1, 2020 Prepare the amortization schedule for the bonds. (Round answers to decimal places, e.. 1,250.) Schedule of Interest Reverse and Bond Discount Amortiration Effective interest Method Bonds Purchased to Yield Interest Receivable Bond Or Interest Discount Cash Received Revenue Amortization Carrying Amount of Bonds Date 1/1/20 7/1/20 1/1/21 7/1/21 1/1/22 1/1/23 Type here to search

Answer 1

a) The journal entry for purchase of bond at a discount is :

Investment in bond	$407,614
To Cash		$407,614

b) The bonds are purchased for $407,614/- at a discount of $32,386/- from par value of $440,000/-.The bond interest income is calculated on the carrying amount of the bond with the market interest rate i.e 10%. Thus interest income is $40,761.4/-. The bond pays annual interest of 12% on par value of $440,000/- i.e $52,800/- annually. It is payable on July 1st and January 1st as $26,400/-. The difference between the interest paid and interest income is $52,800 - $40,761.4 = $12,038.6/-, which is the amount of bond discount accretion for year one. This accretion is added to the carrying amount of the blond i.e $407,614+$12,038.6 = $419,652.6/-would be the carrying amount for year two which is used to calculate bond accretion for year two.

Note : The amortization is shown for the entire 5 years, until maturity of bond in January 1, 2025

Schedule of Interest revenue and bond discount amortization - Effective interest method

   Bond purchased to yield

Date	Interest Receivable or Cash Received($)	Interest Revenue($)	Bond discount amortization($)	Carrying amount of bond($)
01/01/20	Nil	Nil	Nil	407,614
07/01/20	Nil	26,400	Nil	Nil
01/01/21	40,761.4	26,400	12,038.6	419,652.6
07/01/21	Nil	26,400	Nil	Nil
01/01/22	41,965.2	26,400	10,834.74	430,487.34
07/01/22	Nil	26,400	Nil	Nil
01/01/23	43,048.73	26,400	9,751.3	440,238.64
07/01/23	Nil	26,400	Nil	Nil
01/01/24	44,023.86	26,400	8,776.14	449,014.78
07/01/24	Nil	26,400	Nil	Nil
01/01/25	44,901.47	26,400	7,898.52	456,905.3

c)Journal entry for recording semi-annual interest on July 1, 2020 and December 31, 2020

July 1 2020	Cash	$26,400
	To Interest Revenue		$26,400

For December 31,2020 there is no entry as interest is paid only on July 1st and January 1st.

d)Entry for fair value adjustment on December 31, 2021 is

Dec 31, 2021	Fair value adjustment	5,388.6
	To unrealized holding profit		5,388.6

The carrying amount of bond as on January 1 2021 is $419,652.6/- and fair value on December 31, 2021 is $411,094/-. Hence profit value is $8,558.6/-. Reduce the December 31,2020 debit value of $3,170/- to adjust fair value accordingly as above.