On January 1, Year 1 Alcorn Corporation purchased $95,000 of 9% bonds at face value. The bonds are classified as a held-to-maturity investment. The bonds pay interest semiannually on January 1 and July 1. On December 31, Year 1, the fair value of the bonds is $98,000
Required:
1. Prepare the journal entries to record the acquisition of the bonds and the first two interest payments. Include any year-end adjusting entries.
2. If the bonds were classified as an available for sale security, what additional adjusting entry would be made on December 31?
What will be an ideal response?
Answer:
1.
Jan 1
Investment in Bonds
95,000
Cash
95,000
July 1
Cash
8,550
Interest revenue
8,550
Dec 31
Interest receivable
8,550
Interest revenue
8,550
Jan 1 Year 2
Cash
8,550
Interest receivable
8,550
2.
Dec 31
Fair value adjustment--Bonds
3,000
Unrealized gain on investments-OCI
3,000
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