Question

(Debt Investments) Presented below is information from a bond investment amortization schedule with

related fair values provided. These bonds are classified as available-for-sale.

12/31/17 12/31/18 12/31/19

Amortized cost \(491,150 \)519,442 \(550,000

Fair value 497,000 509,000 550,000

Instructions

(a) Indicate whether the bonds were purchased at a discount or a premium.

(b) Prepare the adjusting entry to record the bonds at fair value on December 31, 2017. The Fair Value Adjustment account

has a debit balance of \)1,000 before adjustment.

(c) Prepare the adjusting entry to record the bonds at fair value on December 31, 2018.

Short answer

Fair value adjustment debited and Unrealized holding gain credited with $6,850. unrealized holding loss debited and fair value adjustment credited with $10,442.

Step-by-step solution

Step 1:Purchase of bond

After studying the amortization cost of the bonds, it is concluded that the amortized cost of the bonds increases every. The increase in the amortization cost of every year indicated that the bonds were purchased at a discount.

Entry for the fair value adjustment

Date	Particular	Debit	Credit
December 31, 2017	Fair value adjustment	$6,850
	Unrealized holding- income		$6,850
	(Being entry of the fair value adjustment)

Entry for the fair value adjustment

Date	Particular	Debit	Credit
December 31, 2018	Unrealized holding- loss	$10,442
	Fair value adjustment		$10,442
	(Being entry of the fair value adjustment)