Question

Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on January 1, 2018. The bonds sold for $739,816 and mature in 2037 (20 years). For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Pierce 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 $730,000. The entire change in fair value was due to a change in the general (risk-free) rate of interest. Pierce's net income for the year will include:

Multiple Choice

• A loss from change in the fair value of debt of $10,204.

• A gain from change in the fair value of debt of $10,204.

• An unrealized gain from change in the fair value of debt of $10,617.

• An unrealized loss from change in the fair value of debt of $10,617.

Answer 1

Date	Cash Paid	Interest Expense	Discount on Bonds Payable	Carrying Value of Bonds Payable
Jan. 1, 2018			60184	739816
Jun. 30, 2018	44000	44389	-389	740205
Dec. 31, 2018	44000	44412	-412	740617

Cash paid = $800000 x 11% x 6/12 = $44000

Interest expense:

Jun. 30, 2018: $739816 x 12% x 6/12 = $44389

Dec. 31, 2018: $740205 x 12% x 6/12 = $44412

Unrealized gain = Carrying value of bonds payable - Fair value of bonds payable = $740617 - $730000 = $10617

Answer: An unrealized gain from change in the fair value of debt of $10,617.