Question
In: Accounting
On January 1, 2018, Whittington Stoves issued $810 million of its 10% bonds for $746 million....
On January 1, 2018, Whittington Stoves issued $810 million of its 10% bonds for $746 million. The bonds were priced to yield 12%. Interest is payable semiannually on June 30 and December 31. Whittington records interest at the effective rate and elected the option to report these bonds at their fair value. One million dollars of the increase in fair value was due to a change in the general (risk-free) rate of interest. On December 31, 2018, the fair value of the bonds was $762 million as determined by their market value on the NYSE.
Required:
1. Prepare the journal entry to record interest on June 30, 2018
(the first interest payment).
2. Prepare the journal entry to record interest on December 31,
2018 (the second interest payment).
3. Prepare the journal entry to adjust the bonds to their fair
value for presentation in the December 31, 2018, balance sheet.
Solutions
Expert Solution
1)
| Date | General Journal | Debit | Credit |
| June 30, 2018 | Interest expense | $ 44,760,000.00 | |
| Discount on bonds payable | $ 4,260,000.00 | ||
| Cash | $ 40,500,000.00 |
Working Note
Interest Expense = 746 Million x 6% = 44,760,000
Cash = 810 Million x 5% = 40,500,000
2)
| Date | General Journal | Debit | Credit |
| December 31, 2018 | Interest expense | $ 45,015,600.00 | |
| Discount on bonds payable | $ 4,515,600.00 | ||
| Cash | $ 40,500,000.00 |
Working Note
Interest Expense = (746+4.26) Million x 6%= 45,015,600
Cash = 810 Million x 5% = 40,500,000
3)
| Date | General Journal | Debit | Credit |
| December 31, 2018 | Unrealized holding loss | $ 7,224,400.00 | |
| Fair value adjustment | $ 7,224,400.00 |
Working Note-
Current Book Value = 746,000,000+4,260,000+4,515,600 = 754,775,600
Fair Value Adjustment = 762,000,000- 754,775,600 = 7,224,400
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