Exercise 17-4 No. Date Account Titles and Explanation Debit Credit (a) (b) (To r
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Question
Exercise 17-4
No.
Date
Account Titles and Explanation
Debit
Credit
(a)
(b)
(To record interest received)
(To record fair value adjustment)
(c)
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Exercise 17-4
On January 1, 2017, Novak Company purchased 13% bonds, having a maturity value of $279,000, for $299,622.84. The bonds provide the bondholders with a 11% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Novak Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale category. The fair value of the bonds at December 31 of each year-end is as follows.2017 $297,600 2020 $289,600 2018 $288,500 2021 $279,000 2019 $287,600 (a) Prepare the journal entry at the date of the bond purchase. (b) Prepare the journal entries to record the interest revenue and recognition of fair value for 2017. (c) Prepare the journal entry to record the recognition of fair value for 2018.
(Round answers to 2 decimal places, e.g. 2,525.25. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
No.
Date
Account Titles and Explanation
Debit
Credit
(a)
Jan. 1, 2017Dec. 31, 2017Dec. 31, 2018
(b)
Jan. 1, 2017Dec. 31, 2017Dec. 31, 2018
(To record interest received)
(To record fair value adjustment)
(c)
Jan. 1, 2017Dec. 31, 2017Dec. 31, 2018
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Explanation / Answer
a)
Journal entry for Bond purchase:
January 1, 2017,
Investment in Bond Dr 279000
Premium on purachse of Bond Dr 20622.84
Cash Cr 299622.84
b)
Recording interest revenue and fair value for 2017:
Interest revenue for 2017 = 299622.84*11% = 32958.51
Cash received from Bond issuer company = 279000*13% = 36270
Journal:
Cash Dr 36270
Interest revenue Cr 32958.51
Amortisation of Premium Cr 3311.49
Recognition of Fair Value:
Fair Value at the end of 2017 = 297600
Investment in Bond = 279000
Fair value adjustment = 297600 - 279000 = 18600
Journal:
Investment in Bond Dr 18600
Profit and Loss Cr 18600
c)
Recording interest revenue and fair value for 2018:
Interest revenue for 2018 = 297600*11% = 32736
Cash received from Bond issuer company = 279000*13% = 36270
Journal:
Cash Dr 36270
Interest revenue Cr 32736
Amortisation of Premium Cr 6466
Recognition of Fair Value:
Fair Value at the end of 2018 = 288500
Fair Value at the end of 2017 = 297600
Fair value adjustment = 288500 - 297600 = -9100
Journal:
Profit and Loss Dr 9100
Investment in Bond Cr 9100
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