Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on January 1, 2013. The bonds sold for $739,816 and mature in 2032 (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, 2013, the fair value of the bonds was $730,000. Pierce's earnings for the year will include:

Question

Quizplus · Accepted Answer

The fair value of the bonds decreased from $739,816 to $730,000, resulting in a gain of $9,816. However, the effective interest method must be applied to determine the interest expense, which affects the gain/loss calculation. The difference between the interest expense and the cash interest paid results in an amortization of $801, which when added to the fair value change ($9,816), results in a total gain of $10,617.

Pierce Company Issued 11% Bonds, Dated January 1, with a Face