On January 1, 2016, Lopez Company purchased the $500,000 face value, 5% bonds of Sampson Company for $428,938. The bonds provide the bondholders with a 7% yield. They are dated January 1, 2016, and mature January 1, 2026, with interest receivable June 30 and December 31 of each year. Lopez Company uses the effective-interest method to allocate unamortized discount or premium. The fair values and amortized cost of the Sampson Company bonds were as follows:
Amortized
Date Fair Value Cost (rounded)
June 30, 2016 $428,650 $431,451
December 31, 2016 430,880 434,052
June 30, 2017 440,270 436,743
December 31, 2017 442,140 439,529
Lopez has the positive intent and ability to hold the bonds until January 1, 2026.
Required:
Prepare the journal entry to record the purchase of the bond.
Prepare the journal entries to record the interest received on June 30, 2016 and December 31, 2016.
At what amount would Lopez report the bonds on the balance sheet on June 30, 2016? At December 31, 2016?
Assume that, upon purchase, Lopez decided that it would only hold the bond for four or five years (and not until January 1, 2016). At what amount would they report the bond on the balance on June 30, 2016? At what amount would they report the bond on December 31, 2016?
Assume that, upon purchase, Lopez realized that they would probably only be able to hold the bonds for four or five years (instead of until January 1, 2026). Determine the amount of securities fair value adjustment that Lopez would report on June 30, 2016. How much would they report on December 31, 2016?