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
(e) Prepare the journal entry to record the sale of the bonds on January 1, 2009.
The solution explains the journal entries relating to available for sale debt securities