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    Available for sale debt securities

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    P17-2 (Available-for-Sale Debt Securities) On January 1, 2007, Rob Wilco 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, 2012. Rob Wilco
    Company uses the effective-interest method to amortize discount or premium. On January 1, 2009, Rob
    Wilco Company sold the bonds for $185,363 after receiving interest to meet its liquidity needs.

    (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, 2007, and December 31, 2007.
    (d) If the fair value of Mercury bonds is $186,363 on December 31, 2008, prepare the necessary adjusting
    entry. (Assume the securities fair value adjustment balance on January 1, 2008, is a debit
    of $3,375.)
    (e) Prepare the journal entry to record the sale of the bonds on January 1, 2009.

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    Solution Summary

    The solution explains the journal entries relating to available for sale debt securities