Question

Ppling Enterprises issued 8% bonds with a face amount of $460,000 on January 1, 2024.

The bonds sold for $417,676 and mature in 2043 (20 years).
For bonds of similar risk and maturity the market yield was 9%.
Interest is paid semiannually on June 30 and December 31.
Appling determines interest expense at the effective rate.
Appling elected the option to report these bonds at their fair value.
The fair values of the bonds at the end of each quarter during 2024 as determined by their market values in the over-the-counter market were the following:
March 31 $ 440,000
June 30 425,000
September 30 416,000
December 31 423,000
General (risk-free) interest rates did not change during 2024.

Required:
By how much will Appling’s comprehensive income be increased or decreased by the bonds (ignoring taxes) in the March 31 quarterly financial statements?
By how much will Appling’s comprehensive income be increased or decreased by the bonds (ignoring taxes) in the June 30 quarterly financial statements?
By how much will Appling’s comprehensive income be increased or decreased by the bonds (ignoring taxes) in the September 30 quarterly financial statements?
By how much will Appling’s comprehensive income be increased or decreased by the bonds (ignoring taxes) in the December 31 annual financial statements?
Note: For all requirements, do not round your intermediate calculations. Round your final answers to the nearest whole dollar.

Answer 1

Changes in the fair value of Appling Enterprises' bonds impacted comprehensive income with an increase of $22,324 by March 31, a cumulative increase of $7,324 by June 30, a quarterly decrease of $1,676 by September 30, and an annual increase of $7,000 by December 31, all ignoring taxes.

Step-by-step explanation:

When Appling Enterprises elects to report their bonds at fair value and the market conditions result in changes in the fair value of the bonds, these changes affect the comprehensive income. To calculate how these changes affect comprehensive income:

• Determine the change in fair value of the bonds from the issuance date (or the previous measurement date) to the current measurement date.
• The increase or decrease in fair value is recognized in other comprehensive income, which is a component of equity, not net income, until realized through sale or other means.

As of March 31, the bonds' fair value has increased from $417,676 to $440,000. This results in an increase in comprehensive income of $22,324 (ignoring taxes).

By June 30, the bond's fair value has decreased to $425,000. This results in an increase in comprehensive income of $7,324 (the fair value increase at March 31 minus the decrease from March 31 to June 30).

Similarly, by September 30, the bonds' fair value is $416,000, which leads to a decrease in comprehensive income of $1,676 for the quarter (as it is less than the June 30 fair value).

Finally, by December 31, the fair value has risen to $423,000, increasing comprehensive income by $7,000 for the year, compared to the September 30 value.