Agranoff Corporation purchased two zero-coupon bonds on January 1, 20X1. The first bond was issued by Lilah Company. It had a face amount of $100,000 and was scheduled to mature on December 31, 20X5. Agranoff paid $80,245, resulting in an effective interest rate of 4.5%. The second bond was issued by Juliette Company. It also had a $100,000 face amount but was scheduled to mature on December 31, 20X7. Agranoff paid $72,264, resulting in an effective interest rate of 4.75%.

At December 31, 20X1, the Lilah bond had a fair value of $84,178, and the Juliette bond had a fair value of $76,132. Taxable interest income on zero-coupon bonds is determined under the effective interest method.

Required:

1. Prepare the journal entry to record the interest accrual for the two bonds in 20X1, along with the tax effect.

2. Prepare the journal entry to record the fair value adjustment for 20X1, assuming the bonds are both classified as trading securities. Also prepare the journal entry to record the related income tax effects assuming a 21% corporate tax rate.

3. Prepare the journal entry to record the fair value adjustment for 20X1, assuming the bonds are both classified as available for sale. Also prepare the journal entry to record the related income tax effects assuming a 21% corporate tax rate.