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Presented below is an amortization schedule related to Ivanhoe Company’s 5-year, $160,000 bond with a 7% interest rate and a 5% yield, purchased on December 31, 2015, for $173,855.
| Date | Cash Received |
Interest Revenue |
Bond Premium Amortization |
Carrying Amount of Bonds |
||||
| 12/31/15 | $173,855 | |||||||
| 12/31/16 | $11,200 | $8,693 | $2,507 | 171,348 | ||||
| 12/31/17 | 11,200 | 8,567 | 2,633 | 168,715 | ||||
| 12/31/18 | 11,200 | 8,436 | 2,764 | 165,951 | ||||
| 12/31/19 | 11,200 | 8,298 | 2,902 | 163,049 | ||||
| 12/31/20 | 11,200 | 8,151 | 3,049 | 160,000 |
The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.
| 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | ||||||
| Amortized cost | $171,348 | $168,715 | $165,951 | $163,049 | $160,000 | |||||
| Fair value | $170,800 | $170,900 | $167,800 | $164,100 | $160,000 |
| (a) | Prepare the journal entry to record the purchase of these bonds on December 31, 2015, assuming the bonds are classified as held-to-maturity securities. | |
| (b) | Prepare the journal entry related to the held-to-maturity bonds for 2016. | |
| (c) | Prepare the journal entry related to the held-to-maturity bonds for 2018. | |
| (d) | Prepare the journal entry to record the purchase of these bonds, assuming they are classified as available-for-sale. | |
| (e) | Prepare the journal entries related to the available-for-sale bonds for 2016. | |
| (f) | Prepare the journal entries related to the available-for-sale bonds for 2018. |
Expert Answer
| Requirement | Date | Account titles | Debit | Credit |
| (a) | Dec. 31, 2015 | Held-to-maturity securities | 1,73,855 | |
| Cash | 1,73,855 | |||
| (b) | Dec. 31, 2016 | Cash | 11,200 | |
| Held-to-maturity securities | 2,507 | |||
| Interest Revenue | 8,693 | |||
| (c) | Dec. 31, 2018 | Cash | 11,200 | |
| Held-to-maturity securities | 2,764 | |||
| Interest Revenue | 8,436 | |||
| (d) | Dec. 31, 2015 | Available-for-sale securities | 1,73,855 | |
| Cash | 1,73,855 | |||
| (e) | Dec. 31, 2016 | Cash | 11,200 | |
| Available-for-sale securities | 2,507 | |||
| Interest Revenue | 8,693 | |||
| Dec. 31, 2016 | Unrealized Holding Gain or Loss—Equity | 548 | ||
| Securities Fair Value Adjustment (AFS) | 548 | |||
| ($171,348 – $170,800) | ||||
| (f) | Dec. 31, 2018 | Cash | 11,200 | |
| Available-for-sale securities | 2,764 | |||
| Interest Revenue | 8,436 | |||
| Dec. 31, 2018 | Securities Fair Value Adjustment (AFS) | 1,849 | ||
| Unrealized Holding Gain or Loss—Equity | 1,849 | |||
| ($167,800-$165,951) |
