On July 1 of Year 1, West Company purchased for cash, eight $10,000 bonds of North...

 

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On July 1 of Year 1, West Company purchased for cash, eight $10,000 bonds of North Corporation to yield 10%. The bonds pay 9% interest, payable on a semiannual basis each July 1 and January 1, and mature in three years on July 1. The bonds are classified as AFS securities. West Company's annual reporting period ends December 31. Assume the effective interest method of amortization of any discount or premium. Required a. b. C. Prepare a bond amortization schedule for Year 1 and Year 2 using the effective interest method. Record the entry for the purchase of the bonds by West Company on July 1 of Year 1. Record the adjusting entries by West Company on December 31 of Year 1 to (1) accrue interest revenue and (2) adjust the investment to fair value. The fair value of the bonds at December 31 of Year 1 was $81,000. Indicate the effects of this investment on the Year 1 income statement and the year-end balance sheet. d. e. Record the receipt of interest on January 1 of Year 2. f. After the interest receipt on July 1 of Year 2, two of the bonds were sold for $19,300 cash. 1. Record the receipt of interest on July 1 of Year 2. 2. Record the entry to adjust the two bonds to fair value (FV-OCI). 3. Record the sale, eliminating the related Fair Value Adjustment account balance in one entry. For sim- plicity, ignore any fair value adjustments in Year 2 related to the six remaining bonds. On July 1 of Year 1, West Company purchased for cash, eight $10,000 bonds of North Corporation to yield 10%. The bonds pay 9% interest, payable on a semiannual basis each July 1 and January 1, and mature in three years on July 1. The bonds are classified as AFS securities. West Company's annual reporting period ends December 31. Assume the effective interest method of amortization of any discount or premium. Required a. b. C. Prepare a bond amortization schedule for Year 1 and Year 2 using the effective interest method. Record the entry for the purchase of the bonds by West Company on July 1 of Year 1. Record the adjusting entries by West Company on December 31 of Year 1 to (1) accrue interest revenue and (2) adjust the investment to fair value. The fair value of the bonds at December 31 of Year 1 was $81,000. Indicate the effects of this investment on the Year 1 income statement and the year-end balance sheet. d. e. Record the receipt of interest on January 1 of Year 2. f. After the interest receipt on July 1 of Year 2, two of the bonds were sold for $19,300 cash. 1. Record the receipt of interest on July 1 of Year 2. 2. Record the entry to adjust the two bonds to fair value (FV-OCI). 3. Record the sale, eliminating the related Fair Value Adjustment account balance in one entry. For sim- plicity, ignore any fair value adjustments in Year 2 related to the six remaining bonds.

Answer rating: 100% (QA)

a Bond Amortization Schedule Year 1 Date Cash Interest Interest Amortization Carrying Value Received ... View the full answer