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On January 1, 2017, Kingbird Company purchased 12% bonds, having a maturity value of $278,000, for $299,076.51. 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. Kingbird 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 | $296,600 | 2020 | $288,200 | |||
| 2018 | $287,300 | 2021 | $278,000 | |||
| 2019 | $286,200 |
(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.
(a.) Account titles Debit credit
(b.)
(to record interest recieved)
(to record fair value adjustment)
(c.)
Expert Answer
Solution:
a) Preparing Journal Entry at the Date of the Bond Purchase:
| Date | General Journal | Debit | Credit |
| January 1, 2017 | Debt Investments (Available-for-Sale) | $299,076.51 | |
| Cash | $299,076.51 | ||
| (To Record the Bond Purchase) |
b) Preparing Journal Entry to Record the Interest Revenue and Revenue Recongnition of the Fair Value for 2017:
| Date | General Journal | Debit | Credit |
| December 31, 2017 | Cash ($278,000 * 0.12) | $33,360 | |
| Debt Investments (Available-for-Sale) | $3,452 | ||
| Interest Revenue ($299,076.51 * 0.10) | $29,908 | ||
| (To Record the Interest Revenue) | |||
| December 31, 2017 | Fair Value Adjustment (Available-for-Sale). | $975.84 | |
| Unrealized Holding Gain or Loss-Equity ($296,600 – $295,624.16) | $975.84 | ||
| (To Record the Fair Value Adjustment) |
| Schedule of Interest Revenue and Bond Premium Amortization
Effective-Interest Method 12% Bonds Sold to Yield 10% |
||||
| Date | Cash Received | InterestRevenue | PremiumAmortized | Carrying Amountof Bonds |
| 1/1/2017 | – | – | – | $299,076.51 |
| 12/31/2017 | $33,360 | $29,907.65 | $3,452.35 | $295,624.16 |
| 12/31/2018 | $33,360 | $29,562.42 | $3,797.58 | $291,826.58 |
| 12/31/2019 | $33,360 | $29,182.66 | $4,177.34 | $287,649.24 |
| 12/31/2020 | $33,360 | $28,764.92 | $4,595.08 | $283,054.16 |
| 12/31/2021 | $33,360 | $28,305.42 | $5,054.58 | $278,000.00 |
c) Preparing Journal Entry to Record the Recognition of the Fair Value for 2018:
| AmortizedCost | Fair Value | UnrealizedHolding Gain/Loss | |
| Available-for-sale bonds(at the end of 2018 balance of adjustment accounts should be:) | $291,826.58 | $287,300 | $4,526.58 |
| Previous fair value adjustment (2017) | $975.84 | ||
| Fair value adjustment(2018) | $5,502.42 |
| Date | General Journal | Debit | Credit |
| December 31, 2018 | Fair Value Adjustment (Available-for-Sale). | $5,502.42 | |
| Unrealized Holding Gain or Loss-Equity | $5,502.42 | ||
| (To Record the Fair Value Adjustment) |
