On January 1, 2017, Tusk Company issued $300 million of bonds with a 6% coupon i

Question

On January 1, 2017, Tusk Company issued $300 million of bonds with a 6% coupon interest
rate. The bonds mature in 10 years and pay interest annually on December 31 of each year.
The market rate of interest on January 1, 2017, for bonds of this risk class was 6%. Tusk Company closes its books on December 31.

Tusk elected the fair value option under ASU

2016-1 to account for the bonds.
Required:
1. What amount will appear for the bonds on Tusk Company’s balance sheet on January 1,
2017?
2. What journal entries will Tusk Company make during 2017 to record the effects of the
bonds if the market interest rate for these types of bonds is 9% at December 31, 2017?
3. How would your answer change if the increase in interest rate were due to deteriorating
financial conditions?

Please show your calculation so I can follow. Thank you.

Explanation / Answer

Calculation of book value Where time = 10 years interest = 6% For principal use pv of $1 table 300         * .55839= 168 for interest use pv of ordinary annuity table 300*6%*7.36009= 132 issue price 300 or simply 300 million since bonds have been issued at par Book value on Janaury 1,2017

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