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Intermediate Accounting (Kieso)
Found in: Page 610

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Short Answer

Stave Company invests $10,000,000 in 5% fixed rate corporate bonds on January 1, 2017. All the bonds are classified as available-for-sale and are purchased at par. At year-end, market interest rates have declined, and the fair value of the bonds is now $10,600,000. Interest is paid on January 1. Prepare journal entries for Stave Company to (a) record the transactions related to these bonds in 2017, assuming Stave does not elect the fair option; and (b) record the transactions related to these bonds in 2017, assuming that Stave Company elects the fair value option to account for these bond.

Unrealized holding income is $600,000

Interest earned on bonds is $500,000

See the step by step solution

Step by Step Solution

Step-by-Step Step 1: Definition of bond

A bond is a long-term debt that is issued by acompany to complete its cash requirement. On the bond company provides fixed-rate interest

Step 2: Bond transaction entry when fair value option is not selected

A.

Date

Description

Debit

Credit

January 1, 2017

Debt Investment

$10,000,000

Cash

$10,000,000

Being entry to record the purchase of bonds.

Date

Description

Debit

Credit

January 1, 2018

Cash

$500,000

Interest Revenue

$500,000

Being the entry for bond interest.

.

Step 3: Bond entry when fair value option is selected 

Date

Description

Debit

Credit

January 1, 2017

Debt Investment

$10,000,000

Cash

$10,000,000

Being entry to record the purchase of bonds.

Date

Description

Debit

Credit

January 1, 2018

Cash

$500,000

Interest Revenue

$500,000

Being the entry for bond interest.

.

Date

Description

Debit

Credit

December 31, 2017

Fair Value Adjustment

$600,000

Unrealized Holding Income

$600,000

Being year-end adjustment entry of fair value.

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