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On January 1, 2018, Essence Communications issued $900,000 of its 10-year, 6% bonds for $777,687. The...

On January 1, 2018, Essence Communications issued $900,000 of its 10-year, 6% bonds for $777,687. The bonds were priced to yield 8%. 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, 2018, the market interest rate for bonds of similar risk and maturity was 7%. 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)

Required:
1. Using the information provided, estimate the fair value of the bonds at December 31, 2018.
2. to 4. Prepare the journal entry to record interest on June 30, 2018 (the first interest payment), on December 31, 2018 (the second interest payment) and to adjust the bonds to their fair value for presentation in the December 31, 2018, balance sheet.

1.

Present Value of the bonds ?

2. Record the interest expense on June 30, 2018
3. Record the interest expense on December 31, 2018
4. Record the fair value adjustment December 31, 2018

Solutions

Expert Solution

Essence Communications

1.Present Value of the bonds

= $8,40,645

Payments Amount PV factor Present value
Interest            27,000        13.18968                                               3,56,121
Principle         9,00,000          0.53836                                               4,84,524
Bond price                                               8,40,645
  • Interest= 9,00,000*6%/2 = 27000
  • PV of ordinary annuity of $1 @ n=18, i=3.5% is 13.18968
  • PV of $1 @ n=18, i=3.5% is 0.53836

2. Record the interest expense on June 30, 2018

No. Date Account titles and explanation Debit Credit
1 June 30, 2018 Interest expense (7,77,687*8%/2)              31,107
    Discount on bonds payable                4,107
    Cash              27,000
(To record first interest payment)

3. Record the interest expense on December 31, 2018

No. Date Account titles and explanation Debit Credit
2 December 31, 2018 Interest expense ((7,77,687+4107)*8%/2)              31,272
   Discount on bonds payable                4,272
   Cash              27,000
(to record second interest payment)

4. Record the fair value adjustment December 31, 2018

No. Date Account titles and explanation Debit Credit
3 December 31, 2018 Unrealized holding loss              54,579

   Fair value adjustment

(8,40,645-(7,77,687+4107+4272))

              54,579
(To record fair value adjustment)

ekkarill92 answered 5 months ago
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