Exercise 17-4 No. Date Account Titles and Explanation Debit Credit (a) (b) (To r

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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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