Question

Available-for-sale Investment Problem

On Jan 1, 2020, Company A sold $500,000 of 8% bonds to Company B. The bonds mature on Dec 31, 2023. For bonds of similar risk and maturity, the market rate was 10%. Interest is paid semiannually on June 30 and Dec 31. Company B purchased the bonds for $467,684.20 as an investment and plans to hold them for 2 years. The fair value of bonds at 12/31/2020 was $450,000. Company B's fiscal year end is Dec 31 and 2019 was its first year of business.


1. record the fair-value adjusting entry for Company B as of 12/31/20.

2. Assume the fair value of these bonds is $487,000 at 12/31/21. Record the Journal entries Company B should make on 6/30/21 and on 12/31/21 related to this investment.

3. Assume Company B sells these bonds on 3/1/22 for $470,100. Prepare all journal entries required on 3/1/22 (accrue interest, adjust to fair value, reclassification entry, sale of the investment)

Answer 1

1. Record the Fair-Value Adjusting Entry for Company B as of 12/31/20:

Debit Investment in Bonds $33,315.80

Debit Investment in Bonds $33,315.80Credit Unrealized Loss on Available-for-Sale Investments $33,315.80

2. Journal Entries Company B Should Make on 6/30/21 and on 12/31/21:

6/30/21

6/30/21Debit Interest Expense $20,000

6/30/21Debit Interest Expense $20,000Credit Interest Payable $20,000

6/30/21Debit Interest Expense $20,000Credit Interest Payable $20,00012/31/21

6/30/21Debit Interest Expense $20,000Credit Interest Payable $20,00012/31/21Debit Investment in Bonds $37,315.80

6/30/21Debit Interest Expense $20,000Credit Interest Payable $20,00012/31/21Debit Investment in Bonds $37,315.80Credit Unrealized Gain on Available-for-Sale Investments $37,315.80

3. Journal Entries Required on 3/1/22:

Debit Interest Expense $1,500

Debit Interest Expense $1,500Credit Interest Payable $1,500

Debit Interest Expense $1,500Credit Interest Payable $1,500Debit Investment in Bonds $17,184.20

Debit Interest Expense $1,500Credit Interest Payable $1,500Debit Investment in Bonds $17,184.20Credit Unrealized Loss on Available-for-Sale Investments $17,184.20

Debit Interest Expense $1,500Credit Interest Payable $1,500Debit Investment in Bonds $17,184.20Credit Unrealized Loss on Available-for-Sale Investments $17,184.20Debit Cash $470,100

Debit Interest Expense $1,500Credit Interest Payable $1,500Debit Investment in Bonds $17,184.20Credit Unrealized Loss on Available-for-Sale Investments $17,184.20Debit Cash $470,100Credit Investment in Bonds $470,100

Debit Interest Expense $1,500Credit Interest Payable $1,500Debit Investment in Bonds $17,184.20Credit Unrealized Loss on Available-for-Sale Investments $17,184.20Debit Cash $470,100Credit Investment in Bonds $470,100Debit Gain on Sale of Investment $2,915.80

Debit Interest Expense $1,500Credit Interest Payable $1,500Debit Investment in Bonds $17,184.20Credit Unrealized Loss on Available-for-Sale Investments $17,184.20Debit Cash $470,100Credit Investment in Bonds $470,100Debit Gain on Sale of Investment $2,915.80Credit Unrealized Gain on Available-for-Sale Investments $2,915.80