Question

Presented below is an amortization schedule related to 5-year, $120,000 bond with a 7% interest rate and a 5% yield, purchased on December 31, 2018, for $130,392.

Date Cash Interest Bond Premium Carrying Amount
Received Revenue Amortization of Bonds
12/31/18 $130,392
12/31/19 $8,400 $6,520 $1,880 128,512
12/31/20 8,400 6,426 1,974 126,538
12/31/21 8,400 6,327 2,073 124,465
12/31/22 8,400 6,223 2,177 122,288
12/31/23 8,400 6,112 2,288 120,000
The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.
12/31/19 12/31/20 12/31/21 12/31/22 12/31/23
Amortized cost $128,512 $126,538 $124,465 $122,288 $120,000
Fair value $128,000 $128,800 $126,300 $123,500 $120,000
(a) Prepare the journal entry to record the purchase of these bonds on December 31, 2018, assuming the bonds are classified as held-to-maturity securities.
(b) Prepare the journal entry related to the held-to-maturity bonds for 2019.
(c) Prepare the journal entry related to the held-to-maturity bonds for 2021.
(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 2019.
(f) Prepare the journal entries related to the available-for-sale bonds for 2021.

Answer 1

A. Dr Held-to-Maturity Securities $130,392

Cr Cash $130,392

B. Dr Cash $8,400

Cr Held-to-Maturity Securities $1880

Cr Interest Revenue $6,520

C. Dr Cash $8,400

Cr Held-to-Maturity Securities $2,073

Cr Interest Revenue $6,327

D. Dr Available-for-Sale Securities $130,392

Cr Cash $130,392

E. Dr Cash $8,400

Cr Available-for-Sale Securities $1,880

Cr Interest Revenue $6,520

Dr Unrealized Holding Gain or Loss--Equity $512

Cr Securities Fair Value Adjustment (Available-for-Sale) $512

F. Dr Cash $8,400

Cr Cr Available-for-Sale Securities $2,073

Cr Interest Revenue $6,327

December 31, 2021

Dr Unrealized Holding Gain or Loss--Equity $427

Cr Securities Fair Value Adjustment (Available-for-Sale) $427

Step-by-step explanation:

A. Preparation of the journal entry to record the purchase of these bonds on December 31, 2018, assuming the bonds are classified as held-to-maturity securities.

December 31, 2018

Dr Held-to-Maturity Securities $130,392

Cr Cash $130,392

(To record the purchase of these bonds)

B. Preparation of the journal entry related to the held-to-maturity bonds for 2019

December 31, 2019

Dr Cash $8,400

Cr Held-to-Maturity Securities $1,880

Cr Interest Revenue $6,520

(To record held-to-maturity bonds)

C. Preparation of the journal entry related to the held-to-maturity bonds for 2021

December 31, 2021

Dr Cash $8,400

Cr Held-to-Maturity Securities $2,073

Cr Interest Revenue $6,327

(To record held-to-maturity bonds)

D. Prepare the journal entry to record the purchase of these bonds, assuming they are classified as available-for-sale.

December 31, 2018

Dr Available-for-Sale Securities $130,392

Cr Cash $130,392

(To record the purchase of these bonds)

E. Preparation of the journal entries related to the available-for-sale bonds for 2019

December 31, 2019

Dr Cash $8,400

Cr Available-for-Sale Securities $1,880

Cr Interest Revenue $6,520

(To record available-for-sale bonds)

December 31, 2019

Dr Unrealized Holding Gain or Loss--Equity $512

[$128,512 - $128,000]

Cr Securities Fair Value Adjustment (Available-for-Sale) $512

(To record available-for-sale bonds)

F. Preparation of the journal entries related to the available-for-sale bonds for 2021

December 31, 2021

Dr Cash $8,400

Cr Cr Available-for-Sale Securities $2,073

Cr Interest Revenue $6,327

(To record available-for-sale bonds)

December 31, 2021

Dr Unrealized Holding Gain or Loss--Equity $427

Cr Securities Fair Value Adjustment (Available-for-Sale) $427

($126,300 - $124,465) - ($128,800 - $126,538)

=($1,835-$2,262=$427)

(To record available-for-sale bonds)