On December 31, 2014 Cal Digit held investment in bonds of RC Corporation. When Cal Digit purchased the bonds its intent was to hold the bonds until maturity. On December 31, 2014 the bonds face value is $100,000 and a contract rate of 8%. The carrying value on December 31, 2014 is $107,000. The bonds are being amortized utilizing the effective interest method with a current yield rate of 7%. The bonds are paid annually on December 31 of each year.
On December 31, 2015, after recording the interest for the calendar year 2015, Cal Digit determined that they planned on selling the RC Corporation bonds and did not have the intent to hold the bonds to maturity. Cal Digit decided to reclassify the bonds to available-for-sale debt-securities, as it was unsure if they would trade them very soon. The reason for the reclassification is due to an anticipation of a major restructuring. At the time of the transfer the quoted market price of the bonds were $105,000, assume the transfer date is December 31, 2015.
Prepare the journal entries on December 31, 2015 (that is the Part 1 – amortization of the bonds and collecting the interest and Part 2 – the reclassification (there are two journal entries for part 2)– see the table on page 974 and 975 for assistance. I did not specifically talk about this however you are responsible for this. You need to use your logic of how to complete this)