Answer:
face value $320,000, coupon rate 12%
current market value $344,260.74, effective interest rate 10%
maturity in 5 years, coupon paid yearly
(a) Prepare the journal entry at the date of the bond purchase.
Dr Investment in bonds (AFS) 320,000
Dr Premium on investment in bonds (AFS) 24,260.74
Cr Cash 344,260.74
(b) Prepare the journal entries to record the interest revenue and recognition of fair value for 2020.
unamortized premium = ($320,000 x 12%) - ($344,260.74 x 10%) = $38,400 - $34,426.07 = $3,973.93
Journal entry to record accrued interests:
Dr Interest receivable - investment in bonds (AFS) 38,400
Cr Interest revenue 34,426.07
Cr Premium on investment in bonds (AFS) 3,973.93
Journal entry to record recognition of fair value 2020
fair market value $342,000 - $340,286.81 (carrying value) = $1,713.19
Dr Fair value adjustment - equity 1,713.19
Cr Unrealized gain on investment in bonds bonds (AFS) 1,713.19
(c) Prepare the journal entry to record the recognition of fair value for 2021.
unamortized premium = ($320,000 x 12%) - ($340,286.81 x 10%) = $38,400 - $34,028.68 = $4,371.32
fair market value $329,700 - carrying value $335,915.49 = -$6,215.49
Dr Unrealized loss on investment in bonds bonds (AFS) 6,215.49
Cr Fair value adjustment - equity 6,215.49
