On January 1, 2016, Whittington Stoves issued $770 million of its 6% bonds for $
ID: 2475058 • Letter: O
Question
On January 1, 2016, Whittington Stoves issued $770 million of its 6% bonds for $706 million. The bonds were priced to yield 8%. 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, 2016, the fair value of the bonds was $722 million as determined by their market value on the NYSE. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)
1. Prepare the journal entry to record interest on June 30,2016
2. Prepare the journal entry to record intereset on December 31, 2016
3. Prepare the journal entry to adjust the bonds to their fair value for presentaation in the December 31, 2016 balance sheet
Explanation / Answer
The interest expense to be recorded on 30th June 2016 would be as under: Interst is to be recorded at the effective rate therefore the interest expense will be calculated asunder: Interest Expense=Issue price×(market yield rate/2) =$706million×4% =$28.24 million (Market yield rate =8%) interest paid semiannualy therefore yield rate semiannualy would be 4%. Interest payable on bond semiannualy=$800 million×(6%/2) =$800×3% $ 24.00 1 Journal entry to record interst on 30th June, 2016 is as under: 30th June 2016 Interest expense $ 28.24 Discount on bond $ 4.24 Interest payable $ 24.00 (Being interest recordeda and amortization of discount on bond recorded) Discount on bond=($28.24-$24)=$4.24 2 Journal entry to record interst on 31st Dec., 2016 is as under: 31st Dec 2016 Interest expense $ 28.41 Discount on bond $ 4.41 Interest payable $ 24.00 (Being interest recordeda and amortization of discount on bond recorded) (Interest expense=$706+$4.24)×4%=$28.41 Discount on bond=($28.41-$24)=$4.41 3 The book value of bond as on 31st Dec., 2016 is as under: Book value $706 Amortization of bond discount on 30th June, 2016 $4.24 Amortization of bond discount on 31st Dec, 2016 $4.41 Book value as on 31st Dec. 2016 $715 Fair vlaue as on 31st Dec. 2016 $722 Loss to be recorded due to fair value ($7) The journal entry to adjust the bond at their fair value is as under: 31st Dec 2016 Unrealized holding loss $7 Fair value Adjustment $ 7.00 (Being bonds are adjusted at their fair value) At balance sheet the representation of bond would be as under: Bonds payable $706 Add: Fair value adjustment $7 Less: Discount on issue of bonds ($8.65) Bonds value $704