On January 1, 2017, Pearl Company purchased 12% bonds, having a maturity value of $284,000, for $305,531.40. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Pearl Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale category. The fair value of the bonds at December 31 of each year-end is as follows. 2017 $303,400 2018 $292,200 2019 (a) (b) $291,200 2020 2021 $293,200 $284,000 Prepare the journal entry at the date of the bond purchase. Prepare the journal entries to record the interest revenue and recognition of fair value for 2017. Prepare the journal entry to record the recognition of fair value for 2018
On January 1, 2017, Pearl Company purchased 12% bonds, having a maturity value of $284,000, for $305,531.40. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Pearl Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale category. The fair value of the bonds at December 31 of each year-end is as follows. 2017 $303,400 2018 $292,200 2019 (a) (b) $291,200 2020 2021 $293,200 $284,000 Prepare the journal entry at the date of the bond purchase. Prepare the journal entries to record the interest revenue and recognition of fair value for 2017. Prepare the journal entry to record the recognition of fair value for 2018
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:On January 1, 2017, Pearl Company purchased 12% bonds, having a maturity value of $284,000,
for $305,531.40. The bonds provide the bondholders with a 10% yield. They are dated January 1,
2017, and mature January 1, 2022, with interest received on January 1 of each year. Pearl
Company uses the effective-interest method to allocate unamortized discount or premium. The
bonds are classified as available-for-sale category. The fair value of the bonds at December 31 of
each year-end is as follows.
2017
$303,400
$292,200
2018
2019
(a)
(b)
(c)
$291,200
2020
2021
$293,200
$284,000
Prepare the journal entry at the date of the bond purchase.
Prepare the journal entries to record the interest revenue and recognition of fair value for
2017.
Prepare the journal entry to record the recognition of fair value for 2018.
Expert Solution
Step 1: Methods for amortizing the premium or discount of bonds
There are two methods of amortizing the premium or discount of bonds that are issued at a price other than par:-
(i) effective interest rate method
(ii) the straight line method
The effective interest rate method reflects the economic substance of the transaction.
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