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2 May, 21:56

Richman Company purchased $1,200,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2021, with interest payable on July 1 and January 1. The bonds sold for $1,249,896 at an effective interest rate of 7%. Using the effective interest method, Richman Company adjusted the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2021 and December 31, 2021 by the amortized premiums. At December 31, 2021, the fair value of the Carlin, Inc. bonds was $1,272,000. Prepare the journal entry for Richman Company to record the same.

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  1. 3 May, 00:04
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    Dr. Bond Receivable $30,761

    Cr. Gain on Revaluation $30,761

    Explanation:

    A bond is issued on the premium if it is issued at a value over its face value,

    Bond Premium = Issuance value - Face Value = $1,249,896 - $1,200,000 = $49,896

    July 1,2021

    Amortization = ($1,200,000 x 8%) - ($1,249,896 x 7%) = $8,507 x 6/12 = $4,254

    Un-amortised Premium = $49,896 - $4,254 = $45,642

    Carrying Value = $1,200,000 - $45,642 = $1154,358

    Dec 31, 2021

    Amortization = ($1,200,000 x 8%) - ($1,245,642 x 7%) = $8,507 x 6/12 = $4,403

    Un-amortised Premium = $45,642 - $4,403 = $41,239

    Carrying value = $1,200,000 + $41,239 = $1,241,239

    Revaluation Gain = 1,272,000 - $1,241,239 = $30,761
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