3 1 Problem 8 [discount, OTI impairment, AFS] 2 On June 30, 2020 ABC purchased $500,000 par value bonds dated June 30, 2020 at a purchase price of $462,806. The coupon rate on the bonds is 5% per year and the purchase price of the bonds yield an 4 effective rate of 6% per year. The bonds pay interest semiannually on June 30 and December 31" and 5 mature on June 30, 2030. The fiscal year of ABC ends on December 31st. The fair market value of the 6 bonds on December 31, 2020 was 450,000. ABC received the December 31 interest payment on 7 December 31, 2020. ABC classifies the bonds as Available-for-Sale. 8 ABC does not intend to sell the bonds. However, it is highly likely that circumstances will force the 9 company to sell the bonds before the market price of the bonds recover. 10 11 12 13 1. Prepare all journal entries related to the bond investment that is necessary for ABC to issue GAAP 14 compliant financial statements for the year ended December 31, 2020. 15 16 Enter your answer below. Choose the account from the drop-down list in the yellow cell. Enter the amount of the entry in the green box. 17 Entry to record purchase of bond on 6/30/2020: 18 19 Account Debit Credit 20 1 21 1 22 1 23 24 Entries at 12/31/2020: 25 26 Account Debit Credit 27 28 29 30 31 32 33 NNNNN 33 34 35 2. Redo #1 based on the following revised facts: ABC does not intend to sell the bonds and it is highly 36 unlikely that circumstances will force the company to sell the bonds before the market price of the bonds 37 recover. 75% of the unrealized loss on the bond is attributable to a deterioration in the credit worthiness 38 of the Issuer, the other 25% is due to other factors. 39 40 Enter your answer below. Choose the account from the drop-down list in the yellow cell. Enter the amount of the entry in the green box. 41 Entry to record purchase of bond on 6/30/2020: 42 43 Account Debit Credit 45 46 www Debit Credit 4 4 4 4 48 Entries at 12/31/2020: 49 50 Account 51 52 53 54 55 56 57 58 59 60 61 62 4 4 4 P1 P2 D P3 . P4 P5 P6 P7 B B 1 Column1 2 Allowance for Credit Loss 3 Cash 4 Credit Loss 5 Discount on Bond 6 Dividend receivable 7 Dividend revenue 8 Equity in earnings of XYZ 9 Fair Value Adjustment 10 Interest Revenue 11 Investment in Bond 12 Investment in XYZ common stock 13 Loss on Impairment (NI) 14 Premium on Bond 15 Realized Gain on Sale of Bond 16 Realized Gain on Sale of Stock 17 Realized Loss on Sale of Bond 18 Reclassification adjustment - OCI 19 Unrealized Holding Gain - NI 20 Unrealized Holding Gain - OCI 21 Unrealized Holding Loss - NI 22 Unrealized Holding Loss - OCI 23 24 25 26 27
