Question

Novak Company invests $8,900,000 in 5% fixed rate corporate bonds on January 1, 2017. 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 $9,575,000. Interest is paid on January 1.

Prepare journal entries for Novak Company to

(a) record the transactions related to these bonds in 2017, assuming Novak does not elect the fair option; and

(b) record the transactions related to these bonds in 2017, assuming that Novak Company elects the fair value option to account for these bonds.

Answer 1

ANSWER

Journal Entries - Novak company
S.no.	Date	Particulars	Debit	Credit
(a)	01-Jan-17	Investment in Bond Dr	$8,900,000
		To Cash		$8,900,000
		(To record Investment in Bond)
	31-Dec-17	Interest receivable Dr ($8,900,000 *5%)	$445,000
		To Interest Revenue		$445,000
		(To record Interest Revenue)
	31-Dec-17	No entry	$ 0
S.no.	Date	Particulars	Debit	Credit
(b)	01-Jan-17	Investment in Bond Dr	$8,900,000
		To Cash		$8,900,000
		(To record Investment in Bond)
	31-Dec-17	Interest receivable Dr ($8,900,000 *5%)	$445,000
		To Interest Revenue		$445,000
		(To record Interest Revenue)
	31-Dec-17	Fair Value Adjustment Dr ($9,575,000- $8,900,000 )	$675,000
		To Unrealized Holding Gain or Loss- OCI		$675,000
		(To record fair value adjustment)

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