Question

Indigo Company invests $11,700,000 in 4% fixed rate corporate bonds on January 1, 2020. All the bonds are classified as available-for-sale and are purchased at par. At year-end, market interest rates have declined, and the fair value of the bonds is now $12,387,000. Interest is paid on January 1. Prepare journal entries for Indigo Company to (a) record the transactions related to these bonds in 2020, assuming Indigo does not elect the fair option; and (b) record the transactions related to these bonds in 2020, assuming that Indigo Company elects the fair value option to account for these bonds.

Answer 1

Answer:

a. Indigo do not elect fair value option

                   Journal entries

Date               Description                                       DR                    CR

2020

Jan 1                Bonds-available for sale asset    $11,700,000

                       Cash book                                                            11,700,000

             Being the amount paid on acquisition

Dec 31

                 Interest receivable (4%*11,700,000)    468,000

                 Income statement                                                     468,000

        Being the interest due on the bond at the year end

b. Indigo elect the fair value option

 Date               Description                                      DR                   CR

 2020

Jan 1              Bond-available for sale asset     11,700,000

                       cash book                                                      11,700,000

                Being the amount paid on acquisition

Dec 31         Interest receivable                             468,000

                  Income statement                                                  468,000

             Being the interest due on the bond at the year end

Dec 31           Bond                                                    687,000

                   Revaluation surplus                                                687,000

              Being the excess of fair value over the book value

Explanation: