Question

On January 1, 2017, Monty Company purchased 12% bonds, having a maturity value of $278,000, for $299,076.51. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Monty 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		$296,600		2020		$288,200
2018		$287,300		2021		$278,000
2019		$286,200

(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.)

No.	Date	Account Titles and Explanation	Debit	Credit
(a)
(b)
		(To record interest received)
		(To record fair value adjustment)
(c)

Answer 1

Ans.a) At the date of bond purchase-

Date Particulars Debit Credit

1/1/2017 Debt Investment $299076.51

Cash $299076.51

b)To record the interest revenue and recognition of fair value for year 2017

Date Particulars Debit Credit

31/12/2017 Cash($278000*12%) $33360

Debt Investment $3452.35

Interest Revenue($299076.51*10%) $29907.65

31/12/2017 Fair Value Adjustment    $975.84

Unrealized Holding Gain or Loss    $975.84

($299076.51-3452.35-296600)

c)

31/12/2018 Unrealized Holding Gain or Loss $5502.42

Fair Value Adjustment $5502.42

(299076.51-3452.35-3452.35-345.23+975.84-287300)