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Accounting P17-2 (Debt Securities Available-for-Sale)

P17-2 (Debt Securities Available-for-Sale) On January 1, 2004, Bon Jovi Company purchased $200,000, 8% bonds of Mercury Co. for $184,557. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2009. Bon Jovi Company uses the effective interest method to amortize discount or premium. On January 1, 2006, Bon Jovi Company sold the bonds for $185,363 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, 2004, and December 31, 2004.

(d) If the fair value of Mercury bonds is $186,363 on December 31, 2005, prepare the necessary adjusting entry. (Assume the securities fair value adjustment balance on January 1, 2005, is a debit of $3,375.)

(e) Prepare the journal entry to record the sale of the bonds on January 1, 2006.

Solution Preview

P17-2 (Debt Securities Available-for-Sale) On January 1, 2004, Bon Jovi Company purchased $200,000, 8% bonds of Mercury Co. for $184,557. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2009. Bon Jovi Company uses the effective interest method to amortize discount or premium. On January 1, 2006, Bon Jovi Company sold the bonds for $185,363 after receiving interest to meet its liquidity needs.

Instructions

(a) Prepare the ...

Solution Summary

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