Question

Appling Enterprises issued 9% bonds with a face amount of $580,000 on January 1, 2021. The bonds sold for $530,239 and mature in 2040 (20 years). For bonds of similar risk and maturity the market yield was 10%. 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 2021 as determined by their market values in the over-the-counter market were the following:

March 31 $560,000

June 30 $540,000
September 30 $535,000

December 31 $542,000

General (risk-free) interest rates did not change during 2021.

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 quarterly financial statements?
4. By how much will Appling’s comprehensive income be increased or decreased by the bonds (ignoring taxes) in the December 31 annual financial statements?

Answer 1

		Mar-31	Jun-30	Sep-30	Dec-31
1	Opening value of bond	530239	531895	533592	535332
2	Interest	2.50%	2.50%	2.50%	2.50%
	(a)	13256	13297	13340	13383
3	Face value of bond	580000	580000	580000	580000
4	Interest rate	2%	2%	2%	2%
	(b)	11600	11600	11600	11600
5	Difference [a-b]	1656	1697	1740	1783
5	Carrying value of bond [1+5]	531895	533592	535332	537115
6	Market value of the bond	560000	540000	535000	542000
7	Unrealized gain/loss[6-5]	28105	6408	-332	4885
8	Increase/Decrease of income	14849	-6890	-13672	-8499
	[7-2a]