Question

On January 1, 2021, Essence Communications issued $720,000 of its 10-year, 8% bonds for $630,272. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. Essence Communications records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2021, the market interest rate for bonds of similar risk and maturity was 9%. The bonds are not traded on an active exchange. The decrease in the market interest rate was due to a 1% decrease in general (risk-free) interest rates. (FV of $1, PV of $1, FVA of $1, PVA of $1. FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Using the information provided, estimate the fair value of the bonds at December 31, 2021. 2. to 4. Prepare the journal entries to record interest on June 30, 2021 (the first interest payment), on December 31, 2021 (the second interest payment) and to adjust the bonds to their fair value for presentation in the December 31, 2021, balance sheet.

Answer 1

Interest forenekon and fair value of y Bands at 31st Dec 2020 6 Calculation of Interest Interest closing Date opening Balance Accrued salonica (A) B) [A-B+C) 28800 3 1513.60 632986 30 June 2021 630272 (20.0.0.0X8/x) 6630212x107x) 31 Dee, 2011 632986 28800 31649 635835 (632386x 57 fair value of Bands on 31 Dec, 2011 @ 10% rate=635855 @ Journal Entries in the books of Essence ommunications as on 30 June, 2021. 1 Recognition of acterest Accried pe profit ¢ loss the 31514 To Interest on the 8.%. Bonds 31514 Te Breakce bu for onterest paid Semi Annually Interest as 8% Bands the Dr To Bank the 28800 28800 of Essence Communication Journal Entries in the books as on 31st Dee, 2011 profit & loss the To onterest an - 8% Bonds the Dr 31649 3164g Interest on 86 To Bank Bands Ale or Alc 28800 28800

ij Balance Interest recognition to fair value. L Interest on 8% Bonds the Ar 5563 5563 - to 8%. Bands Ale 1 fais vake recognition @9% market Interest rate Dr 64586 8%. Bonds - To Proft the ç loss the 6458.

fair value of Bonds to be Interest Date Rouge Paid presented on 31st Dee, 2021 Interat closing Acerned Balance -ste) 28262 629834 28343 629377 630272 6302A2 28800 20 June, 2021 - 31 Dee , 2021 629834 28800 fair value of Bands @8% to be presented in 21 Dec 2011 Balance sheet - 62 Notes 630 272 x 9%. * Y = 28362 629834 x 9%xY2 a 28343 ] as on 31st Dec, 2021 Amount Balance sheet [Extract partitulart Non- Current Liabilities 628377 8 le Bonds 6283+