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3 August, 06:18

On January 1, 2020, Oriole Company purchased 12% bonds, having a maturity value of $320,000 for $344,260.74. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest received on January 1 of each year. Oriole 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.

2020

$342,000

2023

$330,700

2021

$329,700

2024

$320,000

2022

$328,700

(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 2020.

(c) Prepare the journal entry to record the recognition of fair value for 2021.

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  1. 3 August, 08:51
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    face value $320,000, coupon rate 12%

    current market value $344,260.74, effective interest rate 10%

    maturity in 5 years, coupon paid yearly

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

    Dr Investment in bonds (AFS) 320,000

    Dr Premium on investment in bonds (AFS) 24,260.74

    Cr Cash 344,260.74

    (b) Prepare the journal entries to record the interest revenue and recognition of fair value for 2020.

    unamortized premium = ($320,000 x 12%) - ($344,260.74 x 10%) = $38,400 - $34,426.07 = $3,973.93

    Journal entry to record accrued interests:

    Dr Interest receivable - investment in bonds (AFS) 38,400

    Cr Interest revenue 34,426.07

    Cr Premium on investment in bonds (AFS) 3,973.93

    Journal entry to record recognition of fair value 2020

    fair market value $342,000 - $340,286.81 (carrying value) = $1,713.19

    Dr Fair value adjustment - equity 1,713.19

    Cr Unrealized gain on investment in bonds bonds (AFS) 1,713.19

    (c) Prepare the journal entry to record the recognition of fair value for 2021.

    unamortized premium = ($320,000 x 12%) - ($340,286.81 x 10%) = $38,400 - $34,028.68 = $4,371.32

    fair market value $329,700 - carrying value $335,915.49 = - $6,215.49

    Dr Unrealized loss on investment in bonds bonds (AFS) 6,215.49

    Cr Fair value adjustment - equity 6,215.49
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