On January 1, 20Y1 Caitlin Corporation issued $10 million in 10-year bonds. The bonds pay 7% interest annually on December 31. At issuance, the market rate of interest for bonds of comparable risk was 8% and the yield on U.S. Treasury Bonds was 3%.

1. Suppose that at issuance, Caitlin decided to account for the 10-year bond issue using the Fair Value Option. If the bonds were priced to yield 6% at the end of 20Y1, what entry would Caitlin have to make in order to present the appropriate fair value in the year-end 20Y1 balance sheet? Assume the change in value was due to market-wide (not firm-specific) conditions.

2. If accounting for Caitlins bonds caused pre-tax earnings to decrease by $500,000 in 20Y2, by how much did Caitlins bonds fall in price during the year? Again, assume the change in value was due to market-wide (not firm-specific) conditions.