On January 1, 2017, Hi and Lois Company purchased 12% bonds, having a maturity value of $300,000, for $322,744.44. 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. Hi and Lois 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 $320,500 2020 $310,000 2018 $309,000 2021 $300,000 2019 $308,000 (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.

Question

Blaine Mitchell

Business

15 October, 07:35

On January 1, 2017, Hi and Lois Company purchased 12% bonds, having a maturity value of $300,000, for $322,744.44. 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. Hi and Lois 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 $320,500 2020 $310,000 2018 $309,000 2021 $300,000 2019 $308,000 (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.

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Answers (1)

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Kathryn Cannon · Answer 1

Consider the following calculations

Explanation:

a) By Investement in bonds (AFS) Dr $322,744.44

To Cash $322,744.44

b) 1. By Cash Dr $36,000 ($300,000*12%)

To Interest $32,274.44 ($322,744.44*10%)

To Investment in bonds (AFS) $3,725.56 (Balancing fig.)

2) By Investment In Bonds (AFS) $1,481.12 {$320,500 - ($322,744.44 - $3,725.56) }

To Unrealised profit on Investment (AFS) Dr $1,481.12

(Amortization of premium in 2014 - $36,000 - ($322,744.44-$3,725.56) * 10% = $4,100

c) By Unrealized loss on investment (AFS) Dr $7,400 ($320,500 - $4100 - $309,000)

To Investment in bonds (AFS) $7,400