Reference no: EM132615686

Question - As a recently hired accountant for Reeves Incorporated., you are provided with last year's balance sheet to familiarize yourself with the business. Reeves Incorporated Balance Sheet December 31, 2019 Assets Current Assets Cash $1,054.312 Accounts Receivable 123,200 Short-term Investments 738,054 Inventories 578,366 Prepaid Expenses 82,310 Total Current Assets $2,576,242 Property, plant and equip (net) 832,400 Intangibles and other assets 692,175 Total Assets $4,100,817 Current Liabilities Accounts payable 69,210 Short-term notes 131,870 Other current liabilities 200,574 Total Current Liabilities $401,654 Long-term debt 1,962,357 Total Liabilities $2,364,011 Stockholders' Equity Common Stock 1,421,300 Retained Earnings 315,506 Total Stockholder's Equity $1,736,806 Total liabilities + Stockholder's $4,100,817.

Question 1. The company acquired as a long-term investment $1 million of 6% bonds, on March 1, 2020. Company management has the positive intent and ability to hold the bonds until they mature in 5 years on March 1, 2025. The market interest rate was 8% for the bonds and the company paid $918,891.04 for the bonds. The company will receive interest semiannually on August 31st and February 28th. As a result of changing market conditions, the fair value of the bonds at December 31, 2020 was $1,050,000.

Required -

a. Prepare the journal entry to record the investment in the bonds on March 1, 2020.

b. Prepare the journal entry to record the interest payment received on August 31, 2020 using the effective (market) interest method.

c. Prepare the adjusting entry (if necessary) for the change in fair value of the bond at December 31, 2020.