On January 1, 2017, Vaughn Company purchased 12% bonds, having a maturity value of $312,000, for $335,654.22. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Vaughn Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale category. The fair value of the bonds at December 31 of each year-end is as follows.

2017 $333,600 2020 $322,000

2018 $320,900 2021 $312,000

2019 $320,000

(a) Prepare the journal entry at the date of the bond purchase.

(b) Prepare the journal entries to record the interest revenue and recognition of fair value for 2017.

(c) Prepare the journal entry to record the recognition of fair value for 2018.

bond securities 335,654.22 debit

cash 335,645.22 credit

--to record purchase of bonds--

cash 37,440 debit

interest revenue 33,564.52

bond securities 3,875.48

--to record interest revenue on the bonds--

bonds securities 1,821.26

unrealized holding gain 1,821.26

--to record recognition of fair value for the year ended Dec 31th 2017--

unrealized holding loss 8,620 debit

bonds securities 8,620 credit

- - to record recognition of fair vale for 2018--

Explanation:

a) we record the bonds for the amount we purchased, we make adjustment at year-end for any difference if needed

b)

312,000 x 12% = 37,440 cash proceeds

335,645.22 x 10% = 33,564.52 interest revenue

amortization 3,875.48

c) fair value: 333,600

book value: (331. 778,74‬)

unrealized gain 1,821.26

d)

37,440 - 333,600 x 10% = 4,080 amortization for the year

fair value at 2018 year-end $ 320,900

book value at 2018 $ 329,520

unrealized holding loss (8,620)