Question

On January 1, 2018, Whittington Stoves issued $820 million of its 6% bonds for $756 million. The bonds were priced to yield 8%. Interest is payable semiannually on June 30 and December 31. Whittington records interest at the effective rate and elected the option to report these bonds at their fair value. One million dollars of the increase in fair value was due to a change in the general (risk-free) rate of interest. On December 31, 2018, the fair value of the bonds was $772 million as determined by their market value on the NYSE. Required: 1. Prepare the journal entry to record interest on June 30, 2018 (the first interest payment). 2. Prepare the journal entry to record interest on December 31, 2018 (the second interest payment). 3. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2018, balance sheet.

Answer 1

June 30th

interest expense 30240000

Discount on bonds payable 5640000

cash 24600000

December 31th

interest expense 30465600

Discount on bonds payable 5865600

cash 24600000

Adjustment to fair value:

unrealized holding loss 4,494,400

Fair Value Adjustment 4,494,400

Step-by-step explanation:

procceds: 756,000,000

face value: 820,000,000

discount on bonds payable: 64,000,000

bond rate: 0.03

market rate: 0.04

Effective-rate method:

June 30th

interest expense:

carrying value x market rate

756,000,000 x 0.04 = 30,240,000

proceeds:

face value x bond rate

820,000,000 x 0.03 = 24,600,000

amortization 5,640,000

December 31th

Carrying value:

756,000,000 + 5,640,000 = 761,640,000

Interest expense:

761,640,000 x 0.04 = 30,465,600

Proceeds: 24,600,000

Amortization: 5,865,600

Adjustment:

761,640,000 + 5,865,600 = 767,505,600

market value (772,000,000)

unrealized holding loss 4,494,400‬