Question
On 1/1/2015, Illini issued 9%, $300,000 face value bonds for $328,558, when the effective market rate (yield) for bonds of similar risk and maturity was
On 1/1/2015, Illini issued 9%, $300,000 face value bonds for $328,558, when the effective market rate (yield) for bonds of similar risk and maturity was 4%. The bonds mature on 12/31/2016. Interest is paid semiannually on June 30 and December 31.
Date | cash interest | effective interest | change of balance | outstanding balance |
1/1/2015 | ||||
6/30/2015 | ||||
12/31/2015 |
1. Assume that Illini elected the fair value option. Due to changes in general market rates, the yield (effective rate) was 5% on 6/30/2015. Prepare the journal entries that Illini recorded on 6/30/2015.
2. Although the market rate did not change from 6/30/2015 to 12/31/2015, due to changes in Illini's credit risk, the effective rate for its bonds was 8% on 12/31/2015. Prepare the journal entries that Illini recorded on 12/31/2015.
3. What was the total effect of the bonds on Illini pre-tax income for 2015? Show your work.
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