Question
On January 1, 2019, IT Company issued $200 million of 5% coupon, 10-year bonds for approximately $185 million. The bonds were issued at an effective
On January 1, 2019, IT Company issued $200 million of 5% coupon, 10-year bonds for approximately $185 million. The bonds were issued at an effective annual rate of 6%. Accordingly, IT prepared the following amortization schedule covering the first two coupon payments under these bonds:
Interest Expense Interest PaidDiscount AmortizedCarrying Value
1/1/19 $185,122,525(carrying value)
6/30/19. $5,553,676 $5,000,000 $553,676 $185,676,201
12/31/19 $5,570,286 $5,000,000 $570,286 $186,246,487
Chambers elected the option to report these bonds at their fair value in the financial statements.
At December 31st, the fair value of the bonds had fallen to $185 million. One million of this decline in value was attributed to an increase in the general level of interest rates, and the remaining was due to a decline in Chambers' credit rating.
a. Prepare the Journal Entry to record the Fair-Value adjustment of these bonds at December 31, 2019. (You don't need to make the entry for the payment itself on that date)
b. Show how these bonds would be reported in Chambers' balance sheet at December 31, 2019.
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