Question

Brubaker Company issued 11% bonds, dated January 1, with a face amount of $400,000 on January 1, 2018. The bonds sold for $369,908 and mature in 2035 (20 years). For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Brubaker determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2018, the fair value of the bonds was $365,000 as determined by their market value on the NYSE. Brubaker’s statement of comprehensive income for the year will include:

Answer 1

Answer:

$5,308

Explanation:

amortization June 30:

($369,908 x 6%) - ($400,000 x 5.5%) = $22,194 - $22,000 = $194

amortization December 31:

($370,102 x 6%) - $22,000 = $22,206 - $22,000 = $206

bond's carrying value = $370,102 + $206 = $370,308

The carrying value of the bonds was $370,308 on December 31, but the market value was only $365,000. Any decrease in the market value of a liability must be reported as a gain under total comprehensive income.