Final answer:
No accounting entry is required for changes in fair value for held-to-maturity bonds as they are measured at amortized cost. A demonstration of present value calculation using an example two-year bond at different discount rates is provided to explain time value of money concepts.
Step-by-step explanation:
The student has inquired about accounting treatment for the change in the fair value of held-to-maturity municipal bonds for the Sweet Corporation. Held-to-maturity securities are measured at amortized cost and not marked to market, therefore, no accounting entry is required for changes in fair value for these securities. However, I will provide an example of present value calculations for a simple two-year bond to illustrate principles of time value of money.
Consider a two-year bond with a face value of $3,000 and an interest rate of 8%. The bond will pay $240 annually in interest. If the discount rate is also 8%, the present value of the bond is $3,000. If the discount rate increases to 11%, the present value would be lower. The present value calculation is as follows:
-
- Year 1 Interest PV: $240 / (1 + 0.08) = $222.22
-
- Year 2 Interest PV: $240 / (1 + 0.08)2 = $205.76
-
- Year 2 Principal PV: $3,000 / (1 + 0.08)2 = $2,577.29
-
- Total PV at 8% discount rate: $222.22 + $205.76 + $2,577.29 = $3,005.27
-
- Total PV at 11% discount rate is calculated similarly but using 11% in the denominator.
Thus, the present value discounts future payments back to the present using the prevailing interest or discount rate. It is important to note that for actual accounting and reporting, no entry is recorded for fair value changes on held-to-maturity bonds.