On January 1, 2013 the Happy Company issued 11% bonds, dated January 1 with a fa

Question

On January 1, 2013 the Happy Company issued 11% bonds, dated January 1 with a face amount of $800,000. The bonds sold for $739,820 and mature in 20 years. For bonds of similar risk and maturity the market yield is 12%. Interest is paid semi-annually on 6-30 and 12-31. Happy decides to amortize the bound discount under straight line approach and elects the option to report these bonds at fair value. On Dec 31, 2013 the fair value was 730,000.

the unrealized holding gain or loss the Happy company would report on its 2013 income statement relative to the bonds is closest to

a)$12,829 gain

b)$3,009 loss

c)$9,820 gain

d)$70,000 gain

Explanation / Answer

a) Gain $12,829

discount = $800,000 - $739,820 = $60,180

Amortisation $60,180/2    = $3009

bonds = $739,820 + 3009   = $ 742,829

hence gain = $742,829 - $730,000 = $12,829

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