Question

Presented below is information taken from a bond investment amortization schedule with related fair values provided. These bonds are classified as available-for-sale. 12/31/20 12/31/21 12/31/22 Amortized cost $472200 $543100 $597900 Fair value $478400 $532100 $597900 (a) Indicate whether the bonds were purchased at a discount or at a premium. (b) Prepare the adjusting entry to record the bonds at fair value at December 31, 2020. The Fair Value Adjustment account has a debit balance of $900 prior to adjustment. (c) Prepare the adjusting entry to record the bonds at fair value at December 31, 2021.

Answer 1

(a) The bonds are issued at a discount.

(b) The required journal entry is as follows:

On December 31, 2020

Fair value adjustment {($478400-$472200) - $900} A/c Dr. $5,300

To Unrealized gain- other comprehensive income $5,300

(To record unrealized gain)

(c) The required journal entry is as follows:

On December 31, 2021

Unrealized loss- other comprehensive income:

= (amortized cost - fair value) + (Unrealized gain + Debit balance prior to adjustment)

= ($543,100 - $532,100) + ($5,300 + $900)

= $17,200

The required journal entry is as follows:

Unrealized gain- other comprehensive income A/c Dr. $17,200

To Fair value adjustment $17,200

(To record unrealized loss)