On January 1, 2018, Whittington Stoves issued $820 million of its 6% bonds for $
ID: 2529799 • Letter: O
Question
On January 1, 2018, Whittington Stoves issued $820 million of its 6% bonds for $756 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, 2018, the fair value of the bonds was $772 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.
Explanation / Answer
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June 30 2018 Interest Expense 756 million*4% 30240000 Cash 820 million*3% 24600000 Dec 31 2018 Interest Expense (756 million+5.64 million)*4% 30465600 Cash 820 million*3% 24600000 Part-1 Date Account Debit Credit June 30 2018 Interest Expense 30240000 Discount on bond payable 5640000 Cash 24600000 Part-2 Dec 31 2018 Interest Expense 30465600 Discount on bond payable 5865600 Cash 24600000 Part-3 Dec 31 2018 Unrealized Holding Loss 4494400 Fair Value adjustment 4494400 Book Value of Bond 756000000 add: Discount (5640000+5865600) 11505600 Increase book value 767505600 Less Fair Value 772000000 Fair value adjustment 4494400