Question

On January 1, 2021, Essence Communications issued $600,000 of its 10-year, 10% bonds for $531,180. The bonds were priced to yield 12%. Interest is payable semiannually on June 30 and December 31. Essence Communications records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2021, the market interest rate for bonds of similar risk and maturity was 11%. The bonds are not traded on an active exchange. The decrease in the market interest rate was due to a 1% decrease in general (risk-free) interest rates. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required: 1. Using the information provided, estimate the fair value of the bonds at December 31, 2021. 2. to 4. Prepare the journal entries to record interest on June 30, 2021 (the first interest payment), on December 31, 2021 (the second interest payment) and to adjust the bonds to their fair value for presentation in the December 31, 2021, balance sheet.

Answer 1

Interest would be halved and number of period will be doubles because of semi annual interest payments

Please find below table useful to compute desired results: -

A B Par Value of Bonds Interest Rate Issued Price Yield Market Interest Rate 600000 =10/100 531180 =12/100 =11/100 Interest 1. Fair Value of Bonds =C1*C2/2 =PV(C5/2,9*2,-07-C1) Credit =C11-D13 13 -C7 14 10 Date General Journal Debit 11 Jun. 30 Intereset Expenses =C3*C4/2 12 2 Discount on bonds payable Cash (to record interest on Jun. 30) 15 Dec. 31 Interest Expenses =(C3+D12)*C4/2 16 3 Discount on bonds payable 17 Cash 18 (to record interest on Dec. 31) 19 Dec. 31 Unrealized holding loss =D20 20 4 FV adjustment 21 (to record the fair value adjustment) =C15-D17 =C7 =C8-C3+D12+D16)

End results would be as follows: -

D B Par Value of Bonds Interest Rate Issued Price Yield Market Interest Rate 600,000 10% 531,180 12% 11% Interest 1. Fair Value of Bonds 30,000 566,262 Credit 1,871 30,000 10 Date General Journal Debit 11 Jun. 30 Intereset Expenses 31,871 2 Discount on bonds payable Cash (to record interest on Jun 30) Dec. 31 Interest Expenses 31,983 Discount on bonds payable Cash (to record interest on Dec. 31) Dec. 31 Unrealized holding loss 31.228 FV adjustment (to record the fair value adjustment) 1,983 30,000 31,228