Question

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Appling Enterprises issued 8% bonds with a face amount of $600,000 on January 1, 2021. The...

Appling Enterprises issued 8% bonds with a face amount of $600,000 on January 1, 2021. The bonds sold for $544,795 and mature in 2040 (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 2021 as determined by their market values in the over-the-counter market were the following:

March 31 $580,000
June 30 560,000
September 30 555,000
December 31 562,000

  
General (risk-free) interest rates did not change during 2021.

Required:

1. By how much will Appling’s comprehensive income be increased or decreased by the bonds (ignoring taxes) in the March 31 quarterly financial statements?
2. By how much will Appling’s comprehensive income be increased or decreased by the bonds (ignoring taxes) in the June 30 quarterly financial statements?
3. By how much will Appling’s comprehensive income be increased or decreased by the bonds (ignoring taxes) in the September 30 quarterly financial statements?
4. By how much will Appling’s comprehensive income be increased or decreased by the bonds (ignoring taxes) in the December 31 annual financial statements?
(For all requirements, do not round your intermediate calculations.)

Solutions

Expert Solution

Effective rate=(1+nominal rate/n)n-1

For quarterly n=12 months(4 quarters in a year) question is calculated on the quarter basis.

8%= (1+0.08/4)4* _1=2%

9%=(1+0.09/4)4*_1=2.250%

A) issuing value of bond ×effective rate=$600000×2%=$12000

Market value×effective rate=$580000×2.250=$13050

Hence income increased by $1050(13050_12000)on 31 march 2021

B) issuing value of bond×effective rate=600000×2%=$12000

Market value of bond×effective rate=560000×2.250%=$5850

Hence income decresed by $6150(5850_12000)on june 30 2021

C) issuing value of bond×effective rate=600000×2%=$12000

Market value of bond×effective rate=555000×2.250%=$12487.5

Hence income increased by $487.5(12487.5_12000)on 30 september 2021

D)issuing value of bond×effective rate=600000×2%=$12000

Market value of bond×effective rate=562000×2.250%=$12645

Hence income increased by $645(12645_12000)on 31 dec 2021

ekkarill92 answered 2 years ago
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