Due Dae: 28 September 2018 (Friday) 5:00 p.m. Held-to-Maturity and Available-for
ID: 2338835 • Letter: D
Question
Due Dae: 28 September 2018 (Friday) 5:00 p.m. Held-to-Maturity and Available-for-Sale Debt Investments (18 points) On January 1, 2018, Folsom Company purchased 4% (annual) bonds, having a maturity ipan value of $400,000. The bonds provide the bondholders with a 2% (annual) yield. They are dated January 1, 2018, and mature December 31, 2027, with interest receivable June 30 and December 31 of each year. Folsom Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category. Instructions: (a) Calculate the cost of the bonds for Folsom and prepare the journal entry at the date of the bond purchase (2 pts). (b) Prepare the first three years of a bond amortization schedule (3 pts) (c) Prepare the journal entries to record the interest received and amortization for 2019 (3 pts). (d) Prepare the necessary fair value adjustment journal entries if the bonds were instead classified as Available-for-Sale and the Fair Values at 12/31/2018 and 12/31/19 were $460,000 and $459,000, respectively. (6 pts) (e) On December 31, 2020, Folsom sold the bonds for $450,000. Assuming the interest payment was received prior to the sale, what is the gain or loss on the sale of the bonds? You can assume that the bonds were classified as Available-for-Sale. (2 pts) () Assume also that as of December 31, 2020, Folsom held no other bonds in its Available- for-Sale Debt Investment portfolio. What other journal entry could be required to remove the investment entirely from Folsom's books? (2 pts)Explanation / Answer
As per policy, we cannot able to post solution more than four sub parts of question.
Answer 1
Purchase date of bond
01-Jan-18
Maturity date of bond
31-Dec-27
Number of years
10
Number of period (interest receive at end of June and Dec means 2 times in a year ) (10*2)
20
Interest received for half yearly (400000*4%*6/12)
8000
Discounting rate (2% for annum then 1% for half year)
1%
Cash flow at end of 20th period (8000+400000)
408000
Period
Value
Discounting factor @ 1%
1
8000
0.990099
7920.792
2
8000
0.980296
7842.368
3
8000
0.97059
7764.721
4
8000
0.96098
7687.843
5
8000
0.951466
7611.726
6
8000
0.942045
7536.362
7
8000
0.932718
7461.744
8
8000
0.923483
7387.866
9
8000
0.91434
7314.719
10
8000
0.905287
7242.296
11
8000
0.896324
7170.59
12
8000
0.887449
7099.594
13
8000
0.878663
7029.301
14
8000
0.869963
6959.704
15
8000
0.861349
6890.796
16
8000
0.852821
6822.57
17
8000
0.844377
6755.02
18
8000
0.836017
6688.139
19
8000
0.82774
6621.919
20
408000
0.819544
334374.1
Present value of bonds
472182
Face value of bonds
400000
Premium on bond investment (472182-400000)
72182
Journal entries
Date
Account title
Debit
Credit
Jan -1-2018
Investment in bond
400000
Premium on bond investment
72182
Cash
472182
(To record cost of investment in bonds.)
Answer 2
Interest received
400000*4%*6/12
Interest revenue
Previous period book value of bond*1%
Amortization of bond premium
Interest received - interest revenue
Debit balance in bond premium
Previous period 's debit balance in bond premium - Amortization of bond premium
Book value of the bond
Debit balance in bond premium + debit balance in bonds investment
Bond premium amortization table for first 3 years
Date
Interest payment
Interest expense
Amortization of bond premium
Debit balance in bond premium
Debit balance in bonds investment
Book value of the bond
Debit cash
Credit interest revenue
Credit bond premium
Jan -1-2018
72182
400000
472182
Jun -30-2018
8000
4722
3278
68904
400000
468904
Dec -31-2018
8000
4689
3311
65593
400000
465593
Jun -30-2019
8000
4656
3344
62249
400000
462249
Dec -31-2019
8000
4622
3378
58871
400000
458871
Jun -30-2020
8000
4589
3411
55460
400000
455460
Dec -31-2020
8000
4555
3445
52015
400000
452015
Answer 3
Journal entries
Date
Account title
Debit
Credit
Jun -30-2019
Cash
8000
Premium on bond investment
3344
Interest revenue
4656
(To record interest revenue and amortization of premium on bond investment.)
Dec -31-2019
Cash
8000
Premium on bond investment
3378
Interest revenue
4622
(To record interest revenue and amortization of premium on bond investment.)
Answer 4
2018
2019
Fair value at ending
460000
459000
Fair value at beginning
472182
460000
(decrease) in fair value
-12182
-1000
Journal entries
Date
Account title
Debit
Credit
Dec -31-2018
Change in fair value of available for sale security
12182
Available for sale investments
12182
(To record fair value adjustment in 2018.)
Dec -31-2019
Change in fair value of available for sale security
1000
Available for sale investments
1000
(To record fair value adjustment in 2019.)
As per policy, we cannot able to post solution more than four sub parts of question.
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