Question

P17-2 (L01) (Available-for-Sale Debt Securities) On January 1, 2017, Novotna Company purchased \(400,000, 8% bonds of

Aguirre Co. for \)369,114. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and

January 1. The bonds mature on January 1, 2022. Novotna Company uses the effective-interest method to amortize discount

or premiums. On January 1, 2019, Novotna Company sold the bonds for \(370,726 after receiving interest to meet its liquidity

needs.

Instructions

(a) Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available for-

sale.

(b) Prepare the amortization schedule for the bonds.

(c) Prepare the journal entries to record the semiannual interest on July 1, 2017, and December 31, 2017.

(d) If the fair value of Aguirre bonds is \)372,726 on December 31, 2018, prepare the necessary adjusting entry. (Assume the

On December 31, 2017, the fair value adjustment balance was a debit of $3,375.)

(e) Prepare the journal entry to record the sale of the bonds on January 1, 2019.

Short answer

Answer:

Gain on the sale of bonds is $1,612. Debt investment debited by $369,114 and cash credited by $369,114.

Step-by-step solution

Entry for the purchase of the bond

Date	Particulars	Debit	Credit
January 1, 2017	Debt Investment	$369,114
	Cash		$369,114
	(Being entry for the purchase of bond)

Bond amortization table

Date	Cash Received	Interest Revenue	Discount amortization	Carrying amount
1/1/17				$369,114
7/1/17	$16,000	$18,456	$2,456	$371,570
1/1/18	$16,000	$18,579	$2,579	$374,149
7/1/18	$16,000	$18,707	$2,707	$376,856
1/1/19	$16,000	$18,843	$2,843	$379,699
7/1/19	$16,000	$18,985	$2,985	$382,684
1/1/20	$16,000	$19,134	$3,134	$385,818
7/1/20	$16,000	$19,291	$3,291	$389,109
1/1/21	$16,000	$19,455	$3,455	$392,564
7/1/21	$16,000	$19,628	$3,625	$396,192
1/1/22	$16,000	$19,808	$3,808	$400,000
Total	$160,000	$190,886	$30,886

Entry for the interest revenue

Date	Particulars	Debit	Credit
July 1, 2017	Cash	$16,000
	Debt Investment	$2,456
	Interest Revenue		$18,456
	(Being entry of interest revenue)
December 31, 2017	Cash	$16,000
	Debt Investment	$2,579
	Interest Revenue		$18,579
	(Being entry of interest revenue)

Entry for the fair value adjustment

Date	Particulars	Debit	Credit
December 31, 2018	Fair value adjustment	$1,953
	Unrealized holding gain		$1,953
	(Being entry of fair value adjustment)

Entry for the sale of the bond.

Date	Particulars	Debit	Credit
January 1, 2019	Cash	$370,726
	Debt Investment		$369,114
	Profit on sale of bond		$1,612
	(Being entry of the sale of securities)