Question

Exercise 17-4

On January 1, 2017, Stellar Company purchased 13% bonds, having a maturity value of $279,000, for $299,622.84. The bonds provide the bondholders with a 11% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Stellar 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.

2017		$297,600		2020		$289,600
2018		$288,500		2021		$279,000
2019		$287,600

(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 2017.
(c)		Prepare the journal entry to record the recognition of fair value for 2018.

(Round answers to 2 decimal places, e.g. 2,525.25. Credit account titles are automatically indented when 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.)

Answer 1

Journal Entry- Stellar Companny
Date	Account Title & Explanation	Debit	Credit
1/1/2017	Debt Investment	$299,622.84
	Cash		$299,622.84
	To Record Purchase of Bond
31/12/2017	Cash ($279000*13%)	$36,270.00
	Debt Investment ( BF)		$3,311.49
	Interest Revenue($299622.84*11%)		$32,958.51
	TO Record Interest Revenue
31/12/2017	Fair Value Adjustment	$1,288.65
	Unrealized Holding Gain or Loss-Equity		$1,288.65
	(297600-(299622.84-3311.49))
	To Record Fair Value Adjustment
31/12/2018	Cash ($279000*13%)	$36,270.00
	Debt Investment (BF)		$3,534.00
	Interest Revenue($297600*11%)		$32,736.00
	TO Record Interest Revenue
31/12/2018	Unrealized Holding Gain or Loss-Equity	$5,566.00
	Fair Value Adjustment		$5,566.00
	(288500-(297600-3534))
	To Record Fair Value Adjustment