On January 1, 2018, Essence Communications issued $610,000 of its 10-year, 6% bonds for $457,961. The...

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On January 1, 2018, Essence Communications issued $610,000 ofits 10-year, 6% bonds for $457,961. The bonds were priced to yield10%. Interest is payable semiannually on June 30 and December 31.Essence Communications records interest at the effective rate andelected the option to report these bonds at their fair value. OnDecember 31, 2018, the market interest rate for bonds of similarrisk and maturity was 9%. The bonds are not traded on an activeexchange. The increase in the market interest rate was due to a 1%increase 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 appropriatefactor(s) from the tables provided.) Required: 1. Using theinformation provided, estimate the fair value of the bonds atDecember 31, 2018. 2. to 4. Prepare the journal entry to recordinterest on June 30, 2018 (the first interest payment), on December31, 2018 (the second interest payment) and to adjust the bonds totheir fair value for presentation in the December 31, 2018, balancesheet.

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4.5 Ratings (919 Votes)

1	Fair Value of Bond

	No of Yrs	20	Semiannual	10*2
	Interest	6%	0.03
	Coupon	18300	610000*6%/2
	Future Value	$610,000

	Using the Present Value function in excel we get

	($490,977.38)		PV(4.5%,20,18300,610000)

	Fair Value of Bond		$490,977.38

2	Prepare the Journal Entry to record interest on June 30,2018

	Interest Expense		22898.05
	To Discount on bonds payable			$4,598.05
	To Cash			$18,300

	(457961*5%)

3	Prepare the Journal Entry to record interest on December 31,2018

	Interest Expense		23127.95
	To Discount on bonds payable			$4,827.95
	To Cash			$18,300

	(457961+4598.05)*5%)

4	Journal Entry to Adjust the bonds to their fair value

	Unrealized holding loss		23590.38
	To Fair Value Adjustment			23590.38

	(490977.38-457961-4827.95-4598.05)

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Transcribed Image Text

On January 1, 2018, Essence Communications issued $610,000 ofits 10-year, 6% bonds for $457,961. The bonds were priced to yield10%. Interest is payable semiannually on June 30 and December 31.Essence Communications records interest at the effective rate andelected the option to report these bonds at their fair value. OnDecember 31, 2018, the market interest rate for bonds of similarrisk and maturity was 9%. The bonds are not traded on an activeexchange. The increase in the market interest rate was due to a 1%increase 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 appropriatefactor(s) from the tables provided.) Required: 1. Using theinformation provided, estimate the fair value of the bonds atDecember 31, 2018. 2. to 4. Prepare the journal entry to recordinterest on June 30, 2018 (the first interest payment), on December31, 2018 (the second interest payment) and to adjust the bonds totheir fair value for presentation in the December 31, 2018, balancesheet.