Question: Discotheque Corp. issued 10-year, 8% bonds at face value for $10,000 on January 1, 2013. At that time, Discotheque elected to account for the bonds

Discotheque Corp. issued 10-year, 8% bonds at face value for $10,000 on January 1, 2013. At that time, Discotheque elected to account for the bonds under the fair value option. At December 31, 2013, the fair value of the bonds was $9,900 due to an increase in Discotheques borrowing rate because of general market risk.

Required:

a. Prepare the journal entry to adjust the bonds payable under the fair value option method on December 31, 2012.

b. How would your answer to (a) change if the decrease in the fair value of the bonds was instead due to an increase in Discotheques borrowing rate due to a decline in Discotheques liquidity?

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