Question

Use the information from BE17-1 but assume the bonds are purchased as an available-for-sale security. Prepare Garfield’s 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

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

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.

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

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:$$\begin{gathered} \mathbf{\text{Amortizationamount=Interestactualreceives}}-\mathbf{\text{ExpectedRateofReturn}} \\ \mathbf{=}\mathbf{11}\mathbf{\%}\mathbf{}\mathbf{\text{of}}\mathbf{}\mathbf{\$}\mathbf{74}\mathbf{,}\mathbf{086}\mathbf{-}\mathbf{9}\mathbf{\%}\mathbf{\text{of}}\mathbf{\$}\mathbf{80}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{8}\mathbf{,}\mathbf{149}\mathbf{-}\mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{200} \\ \mathbf{=}\mathbf{\$}\mathbf{949} \end{gathered}$$

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:$$\begin{gathered} \mathbf{\text{Unrealizedholdingloss=}}\left(\text{Purchaseprice+amortizedamount}\right)\mathbf{-}\mathbf{\text{yearendfairvalue}} \\ \mathbf{=}\left(\$74,086+\$949\right)\mathbf{-}\mathbf{\$}\mathbf{75}\mathbf{,}\mathbf{500} \\ \mathbf{=}\mathbf{\$}\mathbf{465} \end{gathered}$$