Figa Company acquired a bond issued by Stewart Company on January 1, 20X1. The $100,000 bond had a coupon rate of 4%, with payments made semiannually. The bond was scheduled to mature on December 31, 20X8. The bond was purchased for $93,472, a price that resulted in an effective interest rate of 5% compounded semiannually (i.e., 2.5% per six-month period). The bond was classified as held to maturity and was Figa’s only held-to-maturity security.

During 20X1, Stewart suffered a catastrophic explosion at its factory and it became unclear whether the company would be able to service its debt. Figa estimated that Stewart would continue to make all of its interest payments, but it would only be able to pay half of the bond’s face amount at the maturity date. The bond had fallen in value to $55,000.

Required:

1. Prepare a journal entry to record the activity related to the bond in 20X1 including

(a) The initial purchase, 

(b) The interest accrual and discount amortization, 

(c) Any fair value adjustment or credit loss under CECL that should be recorded.

2. Suppose the bond’s fair value at December 31, 20X1, was $65,000 rather than $55,000. Redo requirement 1(c).