On January 1, year 2, Southern Corporation received $107,720 for a $100,000 face amount, 12% bond, a price that yields 10%. The bonds pay interest semiannually. Southern elects the fair value option for valuing its financial liabilities. On December 31, year 2, the fair value of the bond is determined to be $106,460. Southern recognized interest expense of $12,000 in its year 2 income statement. What was the gain or loss recognized on the year 2 income statement to report this bond at fair value

gain = $1,260

Explanation:

given data

face amount = $100,000

Southern Corporation received=  $107,720

bond = 12 %

fair value of the bond = $106,460

interest expense = $12,000

solution

we  have here separate interest expense that is $12,000,

and here gain from difference in the fair market values of bond

so we get here loss or gain that is that is

loss or gain = Bond price year 1 - bond price year 2 1

put here value

loss or gain = $107,720 - $106,460

gain = $1,260

it is positive so we can say it is gain because bond is a liability and lower price in result of gain

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