Question

Assignments Appling Enterprises issued 8% bonds with a face amount of $400,000 on January 1, 2018. The bonds sold for $331364 and mature in 2037 (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 2018 as determined by their market values in the over the counter market were the following: March 31 June 30 September 30 December 31 $350,000 340,000 335,000 342,000 General (risk-free) interest rates did not change during 2018 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? (For all requirements. Do not round your intermediate calculations.) Appling's comprehensive income will be Appling's comprehensive income will be Appling's comprehensive income will be Appling's comprehensive income will be decreased increased

Answer 1

1	Appling’s comprehensive income will be	Decrease	$18636
2	Appling’s comprehensive income will be	Decrease	$6000
3	Appling’s comprehensive income will be	Increase	$5000
4	Appling’s comprehensive income will be	Decrease	$42636

Part 1

January 1 book value and fair value	331364
Increase from discount amortization (5%*331364*3/6)- (4000000*4%*3/6)	284
Increase from accrued interest payable (4000000*4%*3/6)	8000
March 31 book value	339648

March 31 book value	339648
March 31 fair value	350000
Fair value adjustment balance needed: debit/(credit)	(10352)

Interest expense	8284
Unrealized holding loss	10352
Decrease in earnings	$18636

Part 2

March 31 book value	339648
Increase from discount amortization (5%*331364*3/6)- (4000000*4%*3/6)	284
Decrease from payment of accrued interest payable	(8000)
June 30 book value	331932

June 30 book value	331932
June 30 fair value	340000
Fair value adjustment balance needed: debit/(credit)	(8068)
Less: current fair value adjustment balance: debit/(credit)	(10352)
Change in fair value adjustment	2284

Interest expense	8284
Unrealized holding gain	(2284)
Decrease in earnings	$6000

Part 3

June 30 book value	331932
Increase from discount amortization (5%*(331364+284+284)*3/6)- (4000000*4%*3/6)	298
Increase from accrued interest payable	8000
September 30 book value	340230

September 30 book value	340230
September 30 fair value	335000
Fair value adjustment balance needed: debit/(credit)	5230
Less: current fair value adjustment balance: debit/(credit)	(8068)
Change in fair value adjustment	(13298)

Interest expense (5%*(331364+284+284)*3/6)	8298
Unrealized holding gain	(13298)
Increase in earnings	$5000

Part 4

September 30 book value	340230
Increase from discount amortization (5%*(331364+284+284)*3/6)- (4000000*4%*3/6)	298
Decrease from payment of accrued interest payable	(8000)
December 31 book value	332528

December 31 book value	332528
December 31 fair value	342000
Fair value adjustment balance needed: debit/(credit)	(9472)
Less: current fair value adjustment balance: debit/(credit)	5230
Change in fair value adjustment	(14702)

Interest expense march 31	8284
Interest expense June 30	8284
Interest expense September 30	8298
Interest expense December 31	8298
Loss march 31	10352
Gain june 30	(2284)
Gain September 30	(13298)
Loss December 31	14702
Decrease in earnings	$42636