17-04On January 1, 2020, Carla Company purchased 11% bonds, having a maturity value of $328,000 for $353,515.61. The bonds provide the bondholders with a 9% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest received on January 1 of each year. Carla 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 2018 2019 303,400 2020 $292,200 2021 $291,200 $293,200 $284,000
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.

Debt securities                    328,000.00 debit

premium on Debt securities   25.515,61 debit

                       Cash                         353,515.61 credit

cash   36,080 debit

  premium on Debt securities 4,263.6 credit

  interest revenue                  36,080 credit

unrealized loss                         14.547,99‬ debit

premium on debt securities    21.252,01‬ debit    

        discount on debt securities    35,800 credit

unrealized loss                         10.782‬‬ debit

        discount on debt securities    10.782‬ credit

Explanation:

interest will be carrying value times market rate:

353,515.61 x 9% = 31.816,40 interest

cash proceed 328,000 x 11% = 36,080

amortization on premium: 4.263,6‬

premium after proceeds:

25.515,61 - 4,263.6 = 21.252,01‬

Then, we adjust the bonds to the fair value against the premium

353,515.61 - 4,263.6 = 349.252,01‬

fair value as 2017         292,200    

adjustment:                      57,052.01‬

we will erase the premium and do a discount for:

328,000 - 292,200 = 35,800

we do the same process for 2018:

292,200 x 0.09 = 26.298‬

cash proceed 328,000 x 11% = 36,080

amortization on discount:   9,782

35,800 - 9,782 = 26.018‬

book value 292,200 + 9,782 = 301.982‬

fair value                                   291,200

additional discount on                 10.782‬

we again have an unrealzied loss until we sale the bonds

correct, but each time you dont pay the price of the penalty can increase.