Prepare the journal entry at the date of the bond purchase. (Credit account titl
ID: 2606749 • Letter: P
Question
Prepare the journal entry at the date of the bond purchase. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 2 decimal places, e.g. 52.75.)
Account Titles and Explanation
Debit
Credit
Prepare the journal entries to record interest income and interest received and recognition of fair value at December 31, 2017, 2018, and 2019. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 2 decimal places, e.g. 52.75.)
Date
Account Titles and Explanation
Debit
Credit
On January 1, 2017, Ayayai Limited paid $580,940.00 for 12% bonds with a maturity value of $540,000. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature on January 1, 2022, with interest receivable on December 31 of each year. Ayayai accounts for the bonds using the amortized cost approach, applies ASPE using the effective interest method, and has a December 31 year end. Assume that Ayayai hopes to make a gain on the bonds as interest rates are expected to fall. Ayayai accounts for the bonds at fair value with changes in value taken to net income, and separately recognizes and reports interest income. The fair value of the bonds at December 31 of each year end is as follows:
2017 $576,900.00 2018 $556,200.00 2019 $554,040.00 2020 $547,560.00 2021 $540,000.00
Explanation / Answer
Date
Accounting titles and explanation
Debit
Credit
1/1/17
Debt
580940
To Cash
580940
(Purchase of bonds)
31/12/17
Cash (540000*12%)
64800
To Debt (Premium amortized)
6706
To Interest income (580940*10%)
58094
(Interest income and interest received)
31/12/17
Fair Value Adjustment (Fair value - Bond Value)
2666
To Unrealised Holding Gain or Loss - Income
2666
(To bring investment to fair value - Refer to working table for all calculations)
31/12/18
Cash (540000*12%)
64800
To Debt (Premium amortized)
7376.60
To Interest income (574234*10%)
57423.40
(Interest income and interest received)
31/12/18
Unrealised Holding Gain or Loss - Income
-13323.4
To Fair Value Adjustment
-13323.4
(To bring investment to fair value - Refer to working table for all calculations)
31/12/19
Cash (540000*12%)
64800
To Debt (Premium amortized)
8114.26
To Interest income (566857.40*10%)
56685.74
(Interest income and interest received)
31/12/19
Fair Value Adjustment
5954.26
To Unrealised Holding Gain or Loss - Income
5954.26
(To bring investment to fair value - Refer to working table for all calculations)
Working table:
Date
Cash Received
Interest Revenue
Amortized premium
Amount of Bonds
Fair Value
Fair Value Adjustment
Yearly adjustment
1/1/17
580940
31/12/17
64800
58094
6706
574234
576900
2666
2666
31/12/18
64800
57423.4
7376.6
566857.4
556200
-10657.4
-13323.4
31/12/19
64800
56685.74
8114.26
558743.14
554040
-4703.14
5954.26
31/12/20
64800
55875.31
8924.69
549818.45
547560
-2258.45
2444.69
31/12/21
64800
54981.55
9818.45
540000
540000
0
Date
Accounting titles and explanation
Debit
Credit
1/1/17
Debt
580940
To Cash
580940
(Purchase of bonds)
31/12/17
Cash (540000*12%)
64800
To Debt (Premium amortized)
6706
To Interest income (580940*10%)
58094
(Interest income and interest received)
31/12/17
Fair Value Adjustment (Fair value - Bond Value)
2666
To Unrealised Holding Gain or Loss - Income
2666
(To bring investment to fair value - Refer to working table for all calculations)
31/12/18
Cash (540000*12%)
64800
To Debt (Premium amortized)
7376.60
To Interest income (574234*10%)
57423.40
(Interest income and interest received)
31/12/18
Unrealised Holding Gain or Loss - Income
-13323.4
To Fair Value Adjustment
-13323.4
(To bring investment to fair value - Refer to working table for all calculations)
31/12/19
Cash (540000*12%)
64800
To Debt (Premium amortized)
8114.26
To Interest income (566857.40*10%)
56685.74
(Interest income and interest received)
31/12/19
Fair Value Adjustment
5954.26
To Unrealised Holding Gain or Loss - Income
5954.26
(To bring investment to fair value - Refer to working table for all calculations)