Question

On January 1, 2020, Bonita 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. Bonita 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.

Answer 1

Following are the responses to the given points:

Step-by-step explanation:

For point a:

Criteria I

Date: 1-1.2020 Debt Investments
`\$3,44,260.74`

cash
`\$3,44,260.74`

For point b:

Criteria II

Date: 31.12.2020 Interest Account receivable to pay
`\$38,400.00 \ \ \ \ \ \ \ \ \ \ 320000* 12\%`

Debt Investments
`\$3973.93`

rate of Revenue
`\$34,426.07(\$344,261.74 * 0.10)`

31.12-2020 Fair Value Adjustment
`1713.19`

Gain or loss - equity unrealized holding
`1713.19`

for point c:

Criteria III

31.12-2021 Interest Account receivable to pay
`\$38,400`

Debt Investments
`\$4,371`

rate of Revenue
`\$34,029`

31.12-2021 Gain or loss - equity unrealized holding
`\$7,927.69`

Fair Value Adjustment
`\$7,927.69`

`329700-335914.50=6214.50+1713.19 =7,927.69`

Please find the attached table.