Question

In: Accounting

Appling Enterprises issued 10% bonds with a face amount of $540,000 on January 1, 2018. The...

Appling Enterprises issued 10% bonds with a face amount of $540,000 on January 1, 2018. The bonds sold for $496,675 and mature in 2037 (20 years). For bonds of similar risk and maturity the market yield was 11%. 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 2018 as determined by their market values in the over-the-counter market were the following:

March 31 $530,000
June 30 510,000
September 30 501,000
December 31 508,000

   
General (risk-free) interest rates did not change during 2018.

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 quarterlyfinancial statements?
4.By how much will Appling’s comprehensive income be increased or decreased by the bonds (ignoring taxes) in the December 31 annualfinancial statements?
(For all requirements, Do not round your intermediate calculations.)

1. Appling's comprehensive income will be by
2. Appling's comprehensive income will be by
3. Appling's comprehensive income will be by
4. Appling's comprehensive income will be by

Solutions

Expert Solution

Workings:

Semi-annual periods

(A): Interest plus redemption value

(B): PV factor@ 5.5% pa

Present value (A x B)

1

27000

0.947867

25592.42

2

27000

0.898452

24258.22

3

27000

0.851614

22993.57

4

27000

0.807217

21794.85

5

27000

0.765134

20658.63

6

27000

0.725246

19581.64

7

27000

0.687437

18560.79

8

27000

0.651599

17593.17

9

27000

0.617629

16675.99

10

27000

0.585431

15806.63

11

27000

0.554911

14982.58

12

27000

0.525982

14201.5

13

27000

0.498561

13461.14

14

27000

0.472569

12759.37

15

27000

0.447933

12094.19

16

27000

0.424581

11463.69

17

27000

0.402447

10866.06

18

27000

0.381466

10299.58

19

27000

0.361579

9762.635

20

567000

0.342729

194327.3

Present value as on January 01, 2018

507734

Less: Present value of interest from January 01, to 31st March, 2018

Interest for 3 months (540000 x 10%) x 3/12

13500

Present value multiplication factor

0.947867

Present value of interest (13500 x 0.947867)

12796.21

Present value of bond as on 31st March, 2018

494937.8

Part 1:

Particulars

Amount ($)

Fair value of bond on March 31

530000

Less: Present value of bond as on 31st March, 2018

507734

Appling's comprehensive income will be increased by (530000 - 507734)

22266.03

Part 2:

Present value as on January 01, 2018

507734

Less: Present value of interest from January 01, to 30th June, 2018

Interest for 6 months (540000 x 10%) x 6/12

27000

Present value multiplication factor

0.947867

Present value of interest (27000 x 0.947867)

25592.42

Present value of bond as on 30th June, 2018

482141.6

Particulars

Amount ($)

Fair value of bond on 30th June

510000

Less: Present value of bond as on 30th June, 2018

482141.6

Appling's comprehensive income will be increased by (510000 - 482141.60)

27858.45

Part 3:

Present value as on January 01, 2018

507734

Less: Present value of interest from January 01, to 30th September, 2018

Interest for 9 months (540000 x 10%) x 9/12

40500

Present value multiplication factor

0.898452

Present value of interest (40500 x 0.898452)

36387.32

Present value of bond as on 30th September, 2018

471346.6

Particulars

Amount ($)

Fair value of bond on September 30, 2018

501000.00

Less: Present value of bond as on 30th September, 2018

471346.6

Appling's comprehensive income will be increased by (501000 - 471346.60)

29653.36

Part 4:

Present value as on January 01, 2018

507734

Less: Present value of interest from January 01, to 31st December, 2018

Interest for 12 months (540000 x 10%)

54000

Present value multiplication factor

0.898452

Present value of interest (54000 x 0.898452)

48516.43

Present value of bond as on 31st December, 2018

459217.5

Particulars

Amount ($)

Hair value of bond on March 31

508000

Less: Present value of bond as on 30th June, 2018

459217.5

Appling's comprehensive income will be increased by (508000 - 459217.50)

48782.46

ekkarill92 answered 1 year ago
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