Rick\'s Pawn Shop issued 11% bonds, dated January 1, with a face amount of $400,
ID: 2423208 • Letter: R
Question
Rick's Pawn Shop issued 11% bonds, dated January 1, with a face amount of $400,000 on January 1, 2017. The bonds sold for $370,000. For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Rick's determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2017, the fair value of the bonds was $365,000, with $2,000 of the change due to a change in general interest rates. Rick's statement of comprehensive income will include:
Please show steps and calculation. Thanks.
Explanation / Answer
Given that Face amount of bond = $400,000,
Selling price of bond = $370,000
Yield to maturity = 12%
Fair value of bond = $365,000
Change in value = $2,000
Interest expense ($370,000 × 12% × 6/12)
22,200
Discount on bonds payable
200
Cash ($400,000 × 11% × 6/12)
22,000
Interest expense ([$370,000 + 200] × 12% × 6/12)
22,212
Discount on bonds payable
212
Cash ($400,000 × 11% × 6/12)
22,000
Bonds Payable
$400,000
less: Discount
(29,588)
$30,000 - 200 - 212
Book Value
$370,412
Gain-N/I
2,000
Gain-OCI
3,412
Fair value
$365,000
Comprehensive income includes both net income and OCI.
Hence, Rick's statement of comprehensive income will include an unrealized gain from change in the fair value of debt of $5,412.
Interest expense ($370,000 × 12% × 6/12)
22,200
Discount on bonds payable
200
Cash ($400,000 × 11% × 6/12)
22,000
Interest expense ([$370,000 + 200] × 12% × 6/12)
22,212
Discount on bonds payable
212
Cash ($400,000 × 11% × 6/12)
22,000
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