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Chapter 12: QBE17-2 (page 610)

Use the information from BE17-1 but assume the bonds are purchased as an available-for-sale security. Prepare Garfield鈥檚 journal entries for (a) the purchase of the investment, (b) the receipt of annual interest and discount amortization, and (c) the year-end fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.) The bonds have a year-end fair value of $75,500.

Short Answer

Expert verified
  1. The amount debited to debt investment is $74,086.
  2. The amount of discount amortization is $949.
  3. The unrealized holding loss is $465.

Step by step solution

01

Definition of discount amortization

Discount amortization is the process of reducing the cost of the bond in each period to show the reality of the bond.

02

Journal entry of the purchase of the investment

Date

Description

Debit

Credit

January 1, 2017

Debt Investment

$74,086

Cash

$74,086

Being entry to record the purchase of bonds

03

Journal entry for the receipt of annual interest and discount amortization

Date

Description

Debit

Credit

December 31, 2017

Cash

$7,200

Debt Investment

$949

Interest Revenue

$8,149

Being the entry for bond interest and amortization of the discount

Note:Amortizationamount=Interestactualreceives-ExpectedRateofReturn=11%of$74,086-9%of$80,000=$8,149-$7,200=$949

04

Adjustment entry for the fair value

Date

Description

Debit

Credit

December 31,2017

Fair Value Adjustment

$465

Unrealized Holding Loss

$465

Being year-end adjustment entry of fair value

Note:Unrealizedholdingloss=(Purchaseprice+amortizedamount)-yearendfairvalue=($74,086+$949)-$75,500=$465

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