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On January 1, 2018, Whittington Stoves issued $810 million of its 10% bonds for $746 million....

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Accounting

On January 1, 2018, Whittington Stoves issued $810 million ofits 10% bonds for $746 million. The bonds were priced to yield 12%.Interest is payable semiannually on June 30 and December 31.Whittington records interest at the effective rate and elected theoption to report these bonds at their fair value. One milliondollars of the increase in fair value was due to a change in thegeneral (risk-free) rate of interest. On December 31, 2018, thefair value of the bonds was $762 million as determined by theirmarket value on the NYSE.

Required:
1. Prepare the journal entry to record interest on June 30, 2018(the first interest payment).
2. Prepare the journal entry to record interest on December 31,2018 (the second interest payment).
3. Prepare the journal entry to adjust the bonds to their fairvalue for presentation in the December 31, 2018, balance sheet.

Answer & Explanation Solved by verified expert
4.3 Ratings (668 Votes)

1)

Date General Journal Debit Credit
June 30, 2018 Interest expense $ 44,760,000.00
Discount on bonds payable $    4,260,000.00
Cash $ 40,500,000.00

Working Note

Interest Expense = 746 Million x 6% = 44,760,000

Cash = 810 Million x 5% = 40,500,000

2)

Date General Journal Debit Credit
December 31, 2018 Interest expense $ 45,015,600.00
Discount on bonds payable $    4,515,600.00
Cash $ 40,500,000.00

Working Note

Interest Expense = (746+4.26) Million x 6%= 45,015,600

Cash = 810 Million x 5% = 40,500,000

3)

Date General Journal Debit Credit
December 31, 2018 Unrealized holding loss $    7,224,400.00
Fair value adjustment $    7,224,400.00

Working Note-

Current Book Value = 746,000,000+4,260,000+4,515,600 = 754,775,600

Fair Value Adjustment = 762,000,000- 754,775,600 = 7,224,400
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