You have recently been hired at Caterpillar as an accountant. Your company is about to issue a new bond for $10,000,000 to fund a plant expansion, and Chris Keen, your supervisor, is wondering if your company should consider using the fair value option for accounting for the bond. Chris recently attended a continuing education program where the fair value option for financial instruments was discussed. Chris has asked you to investigate. The bond term is 10 years. The stated rate is 8%. Interest is paid annually on 12/31. Projected issuance date: 1/1/2024. Market rate on the date of issuance: 10%. Projected market rates for the next 10 years at the end of the year: 2024 10.00% 2025 9.50% 2026 9.00% 2027 8.75% 2028 8.50% 2029 8.25% 2030 8.25% 2031 8.00% 2032 7.00% 2033 6.00%

1. Demonstrate how bond or bond-related items would the be reported on the fiscal year ended 12/31/2026 Income Statement, fiscal year ended 12/31/2026 Other Comprehensive Income Statement, 12/31/2026 Balance Sheet, and fiscal year ended 12/31/2026 Cash Flows Statement (direct method). Prepare partial statements in good form and include all relevant titles, headings, and subheadings.

2. Show numerical examples of how the fair value option would affect the income statement over the life of the bond, compared to the amortized cost method (all else held equal). I.e., what would be the total bond-related expenses or any other income statement items reported on the Income Statements during the life of the bond using the fair value vs. amortized cost method of accounting for bonds payable? Use the projected market rates given to you