Question

On January 1, 2020, Ivanhoe Company purchased 11% bonds, having a maturity value of $320,000 for $344,893.28. The bonds provide the bondholders with a 9% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest received on January 1 of each year. Ivanhoe 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.

2020		$342,600		2023		$330,400
2021		$329,200		2024		$320,000
2022		$328,300

(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 2020.
(c)		Prepare the journal entry to record the recognition of fair value for 2021.

Answer 1

(a) The journal entry at the date of the bond purchase.
Date	Account Title and Explanation	Debit	Credit
01-01-20	Investments - Available for Sale	$320,000.00
	Premium on Investment - Available for Sale	$24,893.28
	Cash		$344,893.28
	(Being purchase of 11% bond to yield 9%)
(b) Prepare the journal entries to record the interest revenue and recognition of fair value for 2020
Date	Account Title and Explanation	Debit	Credit
12/31/2020	Interest Receivable	$35,200
	Fair Value Adjustment	$1,866
	Premium on Investment - Available for Sale		$4,160
	Interest Income		$31,040
	Unrealized gain on Investments - Available for Sale		$1,866
	Accrue Interest earned on bond investment and adjust to fair value
$ 320,000 * 11%= $ 35,200
$344,893.28 original carrying value - $4,159.60 amortization of premium = $340733.68 new carrying value
$342,600 fair value - $340,733.68 new carrying value = $1,866 fair value adjustment

(c) Prepare the journal entry to record the recognition of fair value for 2021.
Date	Account Title and Explanation	Debit	Credit
12/31/2021	Interest Receivable	$35,200
	Unrealized loss on Investments - Available for Sale	$8,866
	Premium on Investment - Available for Sale		$4,534
	Interest Income		$30,666
	Fair Value Adjustment		$8,866
	Accrue Interest earned on bond investment and adjust to fair value
$ 320,000*11% = $35,200
$342,600 fair value at 12/31/20 - $4,534 amortization = $338,066 booked carrying value
$ 338,066 booked carrying value including prior fair value adjustment - $329,200 current fair value = $8,866 unrealized loss on value

Amortization Schedule for reference
Year	Interest Received = (Face Value x Discount Rate)	Interest Recognized = (Book Value x Market Rate)	Amortization of Premium = (Interest Payment - Interest Expense)	Premium Balance	Face Value of Bond	Book Value of Bond
0	-			$24,893	$320,000	$344,893
1	$35,200	$31,040	$4,160	$20,734	$320,000	$340,734
2	$35,200	$30,666	$4,534	$16,200	$320,000	$336,200
3	$35,200	$30,258	$4,942	$11,258	$320,000	$331,258
4	$35,200	$29,813	$5,387	$5,871	$320,000	$325,871
5	$35,200	$29,328	$5,871	$0	$320,000	$320,000