Question

On January 1, 2017, Tango-In-The-Night, Inc., issued $75 million of bonds with an 8% coupon interest rate. The bonds mature in 10 years and pay interest semi-annually on June 30 and on December 31 of each year. The market rate of interest on January 1, 2017, for bonds of this type was 8%. The company closes its books on December 31. Tango-In-The-Night elects the fair value option under ASU 2016-1. Ignore tax effects.

Required:

1. At what price were the bonds issued?
2. What journal entries would Tango-In-The-Night make in 2017 if the market interest rate for the bonds is 6% at December 31, 2017?
3. On December 31, 2018, the general market interest rate for bonds of this type remain at 6%. However, due to Tango-In-The-Night’s deteriorating financial strength, the market interest rate for its debt is 10%. What journal entries would the company make during 2018?
4. Suppose that the bonds were repurchased for cash on January 1, 2019, when the market rate for the bonds was 10%. What journal entry would the company make to record the debt retirement?
5. What would the January 1, 2019, journal entry be if Tango-In-The-Night had not elected the fair value option?

Answer 1

Refer the below images for the above asked questions,in a detailed way of solution with explanation.

Answer: Requirement : At what price were the bords issued ? are the Since the the coupon rate bonds will be and sold the market at par, $ price frate 75000 ooo Same value tables, there is a The bond price by using Small difference due to Mariket value tables : the present founding. payment Onnuity 20,4% 3 000 ooox 75000000 pv ordinary & pv 20,41 13-59033 $4077099 0045639 $34229 Principal 75000 240 (Note: * $ 3000000 = & z6oooooo 48%-2 (remi - anmolly). Requirement : what journal entries would in 2017 it the market interest rate for Tango in- the - Night maker bond is Gl-at Dec 31, 2017 - ? Date particolars Debit Credit Jan 1,207 $75000000 eash Ale or To Boods payable (Being to record bond issuance) $7500oooo June 30, 2017 $ 3000000 Interest expense Atc or $ 3000000 To cash AIC (Being to record interest expense) ( $75000 000x •04 (Semi-annually 44-)

December 31,207 $ 3000000 Interest expense Ate or o Caf, 41 (Being to record interest 1 3000000 expense) 6 $75000000 X 0.4 (Serni annually 4to) Dec 31, 2017 unrealized loss - Bonds poyable all or $10314780 To Fair value adjustment bonds payable (Bring to record change in band price) 110314780 After the second journal entry, the bonds payable net of the adjustment will reflect tair value. The interest expense and unrealized gain would probably be netted in one financing expense line stem on the income statement. * price adjustment calculation & Remaining periods Market rate payments per year * Fair value (tables): payment 3000000 75000000 x P. v.ordinary annuity 1834. xp.v. 18, 34- 13075351 $41266530 0.58739 $44054250 prinupal $85314780 Fair value at 12/31/17 Book value at 12/31/17 $85314780 $ 75000 000 & 10314780 Adjustment - Credit

Requirement : on Dec 31, 2018, the general market interest rate for bonds of this type remain at 61. However, due to Tangor In The Night's deteriorating financial strength, the markeet Pnterest rate for its debt is not what journal entries the company make during 2018? Answer: Date credit credit Debit $3000000 Jun 30, 2018 particulars Interest expense ale or o caft 4) (Being to record interest expense) or $ 3000000 ④ $750000o X • 044 Dec 31, 2018 $ 1000000 Interest expense ale or To cash ale (Bering to record interest expense) 3000000 fair value adjustment - Bonds payable $893730" To unreatized gain - Bonds panza bie $ 893730 (Being to record change in bond price) Fair value odjutment (credit risk) $17549490" bonds payable ale or To ocê - Bonds payable gain (credit rish) $17549490 fewer payments Worthings: a) price adjustment that effects het income : The four value charges because there are remaining . Remaining periods 16 Market rate payments per year

Fair value (table) payment 3000000 Principal 7000 OGO x proa 16,3-10 x pv 16,7 to 12.56110 0062317 $37 683300 I 46737750 484421050 fair value at 12/31118 using ble fair value at 12l3ill using 64 24421950 85314760 (993730) Adjustment - debit This adjustment will decrease the book. value of the band. b) price adjustment that effects Oct Remaing periods 16 Marinet yate r ona payments per year a Four value (tables): payment 3000000 & proa 16,51 750000bo 4 pv 16,51. 10-13797 0:45811 рутой ро! $32513310 $34358250 $6687 1560 Fair value at Fair value at 12/31118 osing lot. 10131118 oling 61 6687-1560 844210.50 (17549 490) Adjustment - debit & check of bond payable book value: Bonds payable at issuance price 75 000 000 Fair value adjultment (10314780 942050 Less 89 3730) Fair vawe at 6-12 84 421050 fair value adjustment (credit risk) (17549490) For vakre at tot 66871560

Requirement 9 ² suppose that the bonds were reporchased for Cash on Jan 1, 2019 when the market rate for the bonds was 10t0. What journal entry would the company make to record the debt retirement ? Answers Date eredt 11/2019 particulars Debit Bonds payable All DY $75 000000 Fair value adjustment - Ate or $9421050 y bonds payable To far value adjustment bonds payable . (credit risk) To cash Ale $ 17,549490 4 6687-1560 OCT - Bonds payable gain Alor $17549490 (credit risk) To Gain on bond retirement (Bring to transfer gan from ADI). $17549490 Requirement : What would the Jan 1, 2019, gango - in- the Night had not value options journal elected entry be it the fair Answer: particulars Date Debit credit $ 75000000 1/1/2019 Bonds payable Alc or To cash Ale Go Gain on bond retirement $66871560 $8128440 The gain is lower increased because the debr to far value in had not been prror years