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16 November, 02:00

Indigo Company invests $11,700,000 in 4% fixed rate corporate bonds on January 1, 2020. All the bonds are classified as available-for-sale and are purchased at par. At year-end, market interest rates have declined, and the fair value of the bonds is now $12,387,000. Interest is paid on January 1. Prepare journal entries for Indigo Company to (a) record the transactions related to these bonds in 2020, assuming Indigo does not elect the fair option; and (b) record the transactions related to these bonds in 2020, assuming that Indigo Company elects the fair value option to account for these bonds.

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  1. 16 November, 05:46
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    a. Indigo do not elect fair value option

    Journal entries

    Date Description DR CR

    2020

    Jan 1 Bonds-available for sale asset $11,700,000

    Cash book 11,700,000

    Being the amount paid on acquisition

    Dec 31

    Interest receivable (4%*11,700,000) 468,000

    Income statement 468,000

    Being the interest due on the bond at the year end

    b. Indigo elect the fair value option

    Date Description DR CR

    2020

    Jan 1 Bond-available for sale asset 11,700,000

    cash book 11,700,000

    Being the amount paid on acquisition

    Dec 31 Interest receivable 468,000

    Income statement 468,000

    Being the interest due on the bond at the year end

    Dec 31 Bond 687,000

    Revaluation surplus 687,000

    Being the excess of fair value over the book value
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