Question

Exercise 9-14

On July 1, 2020, Bridgeport Aggregates Ltd. purchased 6% bonds having a maturity value of $65,000 for $67,331. The bonds provide the bondholders with a 5% yield. The bonds mature four years later, on July 1, 2024, with interest receivable June 30 and December 31 of each year. Bridgeport uses the effective interest method to allocate unamortized discount or premium. The bonds are accounted for using the FV-OCI model with recycling. Bridgeport has a calendar year end. The fair value of the bonds at December 31, 2020 and 2021, was $67,296 and $66,402, respectively. Assume fair value adjustments are recorded at year end only. Immediately after collecting interest on December 31, 2021, the bonds were sold for $66,402.

A. Prepare the journal entry at the date of the bond purchase (July 1, 2020).

B. Prepare a bond amortization schedule to December 31, 2021.

Schedule of Interest Revenue and Bond Premium Amortization Effective-Interest Method
Date		Cash Received		Interest Revenue		Premium Amortized		Amortized Cost of Bonds
July 1, 2020		—		—		—		$
Dec. 31, 2020		$		$		$
June 30, 2021
Dec. 31, 2021

C. Prepare the entries and year-end entries from December 31, 2020, through to the collection of interest on December 31, 2021.

Date	Account Titles and Explanation	Debit	Credit
December 31, 2020June 30, 2021December 31, 2021
	(To record collection of interest)
	(To record fair value adjustment)
December 31, 2020June 30, 2021December 31, 2021
	(To record collection of interest)
December 31, 2020June 30, 2021December 31, 2021
	(To record collection of interest)

D. Following the three-step approach, prepare the journal entries for the sale of the bond on December 31, 2021. Include the reclassification of unrealized gains and losses to net income

Answer 1

(A) Journal entry at the date of the bond purchase:

Credit Date Account Titles & Explanation Debit 1-Jul-2020 FV-OCI Investments $ 67,331 Cash (To record bond purchase) $67,331

(B) Bond amortization schedule upto December 31, 2021:

Schedule of Interest Revenue and Bond Premium Amortization Effective-Interest Method Cash Interest Premium Amortized Date Received Revenue Amortized Cost of Bonds (i) (ii) (i- ii) 1-Jul-2020 $ $ $ $ 67,331 31-Dec-2020 $ 1,950 (a) $ 1,683 (b) $ 267 $ 67,064 (c) 30-Jun-2021 $ 1,950 $ 1,677 (d) $ 273 $ 66,791 (e) 31-Dec-2021 $ 1,950 $ 1,670 (f) $ 280 $ 66,511 (8)

Notes:

a) $65,000 x 6% x ⁶/₁₂ = $1,950 (periodical cash received)

b) $67,331 x 5% (yield) x ⁶/₁₂ = $1,683

c) $67,331 - $267 = $67,064

d) $67,064 x 5% x ⁶/₁₂ = $1,677

e) $67,064 - $273 = $66,791

f) $66,791 x 5% x ⁶/₁₂ = $1,670

g) $66,791 - $280 = $66,511

(C) Entries and year-end entries from December 31, 2020, through to the collection of interest on December 31, 2021:

Credit $ 267 $ 1,683 $ 232 Date Account Titles & Explanation Debit 31-Dec-2020 Cash $ 1,950 FV-OCI Investments Interest Income (To record collection of interest) 31-Dec-2020 FV-OCI Investments ($67,296 - $67,064) $ 232 Unrealised Gain or Loss - OCI (To record fair value adjustment) 30-Jun-2021 Cash $ 1,950 FV-OCI Investments Interest Income (To record collection of interest) 31-Dec-2021 Cash $ 1,950 FV-OCI Investments Interest Income (To record collection of interest) $ 273 $ 1,677 $ 280 $ 1,670

(D)  Journal entries for the sale of the bond on December 31, 2021 following the three-step approach:

Debit Credit $ 1,448 $ 1,448 $ 66,402 Date Account Titles & Explanation 31-Dec-2021 FV-OCI Investments [$66,402 - ($67,296 - $273 - $280)] Unrealised Gain or Loss - OCI (To record fair value adjustment to date of disposal) 31-Dec-2021 Cash FV-OCI Investments (To record the disposal of bond) 31-Dec-2021 Loss on disposal of Investments - FV-OCI ($232 - $1,448) Unrealised Gain or Loss - OCI (To reclassify accumulated unrealised gains and losses from OCI to net income) $ 66,402 $ 1,216 $ 1,216