9th Edition

ISBN: 9781259722660

Author: J. David Spiceland, Mark W. Nelson, Wayne M Thomas

Publisher: McGraw-Hill Education

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A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as th…

Note Valuation

It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:

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Textbook Question

Chapter 14, Problem 14.31E

Reporting bonds at fair value; calculate fair value

• LO14–6

On January 1, 2018, Essence Communications issued $800,000 of its 10-year, 8% bonds for $700,302. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. Essence Communications records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2018, the market interest rate for bonds of similar risk and maturity was 9%. The bonds are not traded on an active exchange. The increase in the market interest rate was due to a 1% increase in general (risk-free) interest rates.

Required:

1. Using the information provided, estimate the fair value of the bonds at December 31, 2018.

2. Prepare the journal entry to record interest on June 30, 2018 (the first interest payment).

3. Prepare the journal entry to record interest on December 31, 2018 (the second interest payment).

4. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2018, balance sheet.

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Chapter 14, Problem 14.30E

Chapter 14, Problem 14.32E

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Chapter 14 Solutions

Intermediate Accounting

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Solution Summary: The author calculates the fair value of bonds as on 1st December 2018. They are a debt instrument used for the purpose of raising funds of corporations or governmental agencies.

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