P17-2(Available-for-Sale Debt Securities)On January 1, 2014, Novotna Company purchased $400,000, 8% bonds of Aguirre Co. for $369,114. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2019. Novotna Company uses the effective-interest method to amortize discount or premium. On January 1, 2016, Novotna Company sold the bonds for $370,726 after receiving interest to meet its liquidity needs.

Instructions

• (a)Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available-for-sale.
• (b)Prepare the amortization schedule for the bonds.
• (c)Prepare the journal entries to record the semiannual interest on July 1, 2014, and December 31, 2014.
• (d)If the fair value of Aguirre bonds is $372,726 on December 31, 2015, prepare the necessary adjusting entry. (Assume the fair value adjustment balance on January 1, 2015, is a debit of $3,375.)
• (e)Prepare the journal entry to record the sale of the bonds on January 1, 2016.