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:
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.
|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
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.
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