ABC Company purchased $1,200,000 of 8%, 5-year bonds from XYZ, Inc. on January 1, 2021, with interest payable on July 1 and January 1. The bonds sold for $1,249,896 at an effective interest rate of 7%, and were held as available for sale.

1. Record the entry to purchase the bonds.

2. Prepare the following schedule for the first two periods using the effective interest method of

amortization.

Date Cash rec'd Interest rev Premium amortization Carrying value

1/1/21 1,249,896

7/1/21

1/1/22

3. At 12/31/21, the bonds had a fair value of $1,230,000. Prepare the journal entry for the fair

value adjustment.