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Zepler [3.9K]
2 years ago
11

Crawford Inc. has bonds outstanding during a year in which the general (risk-free) rate of interest has risen. Crawford elected

the fair value option for the bonds upon issuance. What will the company report for the bonds in its income statement for the year? Multiple Choice Interest expense and a gain. Interest expense and a loss. A gain and no interest expense. Interest expense and no gain or loss.
Business
1 answer:
kiruha [24]2 years ago
7 0

Answer:

Interest expense and a gain.

Explanation:

US GAAP allows companies to report their financial assets or financial liabilities at their fair market value, this is called the fair value option.

If interest rates increase, and of course the coupon rate is fixed, then they value of bonds will decrease. The same logic applies to bonds sold at a discount.

In this case, the company must report an interest expense in the income statement regardless of what happens to the interest rate, since the company must pay the coupon rate.

Since the price of the bonds decreased, then the company's liabilities (bonds payable) decrease, so the company must report a gain = bond's previous value - bond's current value

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Answer:

$112,000

Explanation:

The Equity method shall be used in this question for determining book value of investment made by the Johnston company in Truly Inc because the investment gives the Johnston company the significant influence over the Truly Inc.

Under equity method, the book value of investment made by the Johnston company as at end of year 1 shall be determined as follow:

Amount invested initially                                 $100,000

Add: Net income for the year                          $20,000

(50,000*40%)

Less: dividends received                                 ($8,000)

(20,000*40%)    

Book value of investment at end of year 1      $112,000

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