Reference no: EM133007243

On January 1, 2021, Ada Company purchased 4 year, $300,000, 6% bonds of Austin Company for $313,128. The bonds were purchased to yield 5% interest. Interest is payable annually on January 1. Ada Company uses the effective-interest method to amortize discount or premium on bond investments.

On January 1, 2022, Ada Company sold the bonds for $305,600 after receiving the interest payment.

INSTRUCTIONS:

Problem (a) Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available-for-sale.

Problem (b) Prepare the amortization schedule for the bonds.

Problem (c) Prepare the journal entry to record the annual interest December 31, 2021.

Problem (d) If the fair value of Austin Company's bonds is $310,000 on December 31, 2021, prepare the necessary adjusting entry. (Assume the fair value adjustment balance on January 1, 2021, is a credit of $2,790.)

Problem (e) Prepare the journal entry to record the sale of the bonds on January 1, 2022.

Problem (f) If the bonds were classified held-to-maturity, would anything be different in regards to the accounting for the purchase and sale of the bonds? If so, explain in detail what the differences would be.

Problem (g) If the bonds were classified as trading, would anything be different in regards to the accounting for the purchase and sale of the bonds? If so, explain in detail what the differences would be.