On July 1, 2020, Menard Concrete Ltd. purchased 5% bonds having a maturity value of $50,000 for $48,645.70. The bonds provide the bondholders with a 6% yield. The bonds mature July 1, 2023, with interest receivable June 30 and December 31 of each year. Menard uses the effective interest method to allocate unamortized discount or premium. The bonds are accounted for using the FV-OCI model with recycling. Menard has a calendar year end. The fair value of the bonds at December 31, 2020 and 2021, was $49,100 and $49,500, respectively. Assume fair value adjustments are recorded at year end only. Immediately after collecting interest on July 1, 2022, the bonds were sold for $49,850. Assume that the bonds are the only investments held by Menard Concrete Ltd. and ignore all income taxes.

Instructions

a. Prepare the journal entry at the date of the bond purchase.

b. Prepare a bond amortization schedule. Round amounts to the nearest cent.

c. Prepare the entries and year-end entries from December 31, 2020, through to the collection of interest on July 1, 2022.

d. Following the three-step approach, prepare the journal entries for the sale of the bonds on July 1, 2022. Include the reclassification of unrealized gains and losses to net income. 

e. Rounding all amounts on financial statements to the nearest dollar, prepare a partial comparative statement of financial position at December 31, 2020, 2021, and 2022, showing only the related accounts for the bond investment.

f. Prepare a partial comparative statement of income for the fiscal years ended December 31, 2020, 2021, and 2022, showing only the related accounts for the bond investment.

g. Prepare a partial comparative statement of comprehensive income for the fiscal years ended December 31, 2020, 2021, and 2022.

h. Prepare a partial statement of changes in shareholders’ equity for the years ended December 31, 2020, 2021, and 2022, showing retained earnings and accumulated other comprehensive income. Assume a balance of $800,000 for retained earnings at January 1, 2020, and no declaration of dividends during 2020, 2021, or 2022.

i. Digging Deeper How much total income was realized from the investment? Why would Menard sell the bond ahead of the maturity date? What changed in the market rate of interest between the purchase and the resale date?