3. AFS Debt Investment and Financial Statement Presentation:

On 4/30, Year 8, a corporation purchases a $10,000, 8% stated rate bond for $9,652 (i.e., at 96.52) plus accrued interest of $267. The market rate or yield on the bond is 9.50%. It is accounted for as an AFS investment. The bonds mature on 12/31, Year 10. The following fair values are for the dates indicated:

12/31/Yr 8$9,82012/31/Yr 9$9,97512/31/Yr 10$10,000

Even though the investment is appropriately accounted for as AFS, the investor holds the bond until maturity date. Thus, the bond is settled at 12/31, Year 10, at its maturity value of $10,000, which is also its fair value on that date.

Complete the amortization table below, rounding to the nearest whole dollar after each calculation.

DebitCreditDebitDate

8.00%

CASH

Interest

9.50% INTEREST INCOME

INVEST -

AFS, Amort.

of Discount

Amortized

Carrying

Value

Fair

Value

Fair

Value

Adjustment

4/30/Yr 86/30/Yr 8133( x _____ % x 2 / 12 ) =2012/31/Yr 8( x _____ % x __ / __ ) =9,820=6/30/Yr 9( x _____ % x __ / __ ) =12/31/Yr 9( x _____ % x __ / __ ) =9,975=6/30/Yr10( x _____ % x __ / __ ) =12/31Yr. 10Plug due to rounding 474Plug 7410,00010,000= 0Totals2,1332,481348

Post the appropriate amounts to the t-accounts below:

UNREAL. G/L OCI FAIR VALUE ADJUSTMENT

4/30/Yr 804/30/Yr 8012/31/Yr 812/31/Yr 812/31/Yr 912/31/Yr 912/31/Yr 1011712/31/Yr 1011712/31/Yr 10012/31/Yr 100

Record the journal entries on the next page.

Journal Entries:

4/30/Yr 8INVESTMENT IN AFS - DEBTINTEREST RECEIVABLE267 CASH6/30/Yr 8CASHINVESTMENT IN AFS - DEBT INTEREST RECEIVABLE INTEREST INCOME12/31/Yr 812/31/Yr 86/30/Yr 912/31/Yr 912/31/Yr 96/30/Yr 1012/31/Yr 10Maturity of the bond:12/31/Yr 10UNREALIZED GAIN OR LOSS OCI117 FAIR VALUE ADJUSTMENT117CASH10,000 INVESTMENT IN AFS - DEBT10,000