Question

Federal Semiconductors issued 8% bonds, dated January 1, with a face amount of $850 million on January 1, 2021. The bonds sold for $771,793,266 and mature on December 31, 2040 (20 years). For bonds of similar risk and maturity the market yield was 9%. Interest is paid semiannually on June 30 and December 31. Federal determines interest at the effective rate. Federal elected the option to report these bonds at their fair value. On December 31, 2021, the fair value of the bonds was $760 million as determined by their market value in the over-the-counter market. Assume the fair value of the bonds on December 31, 2022 had risen to $766 million.

Required:

Complete the below table to record the following journal entries.
1. & 2. Prepare the journal entries to adjust the bonds to their fair value for presentation in the December 31, 2021, balance sheet, and adjust the bonds to their fair value for presentation in the December 31, 2022, balance sheet. Federal determined that none of the change in fair value in 2021 was due to a decline in general interest rates and one-half of the increase in fair value in 2022 was due to a decline in general interest rates.

Calculation General Journal Complete the below table to determine the amounts for the journal entries. (Negative amount should be indicated by a minus sign. Round final answers to the nearest whole dollars.) Semiannual Interest Period-End Cash Interest Bond Interest Paid Expense Increase in Balance Carrying Value Fair Value Unrealized Holding Gain (loss) $ 771,793,266 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022 $ 760,000,000 $ 766,000,000 Fair Value Adjustment 01/01/2021 06/30/2021 12/31/2021 Bonds Payable 771,793,266 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022 06/30/2022 12/31/2022

Answer 1

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Period	Cash Interst Paid	Bond Interest Expense	Increase in balance	Carrying Value	Fair Value	Unrealised Holding gain/(loss)
01/01/2021				$       771,793,266
06/30/2021	$                                      34,000,000	34,730,697	$                         730,697	$       772,523,963
12/31/2021	$                                      34,000,000	34,763,578	$                         763,578	$       773,287,541	$      760,000,000	$                                           13,287,541
06/30/2022	$                                      34,000,000	34,797,939	$                         797,939	$       774,085,481
12/31/2022	$                                      34,000,000	34,833,847	$                         833,847	$       774,919,327	$      766,000,000	$                                             8,919,327
	Bond Payable			Fair Value Adjustment
01/01/2021		$                       800,000,000	01/01/2021
06/30/2021		$                       772,523,963	06/30/2021
12/31/2021		$                       773,287,541	12/31/2021	$       760,000,000	$        13,287,541
06/30/2022		$                       774,085,481	06/30/2022
12/31/2022		$                       774,919,327	12/31/2022	$       766,000,000	$        (4,368,214)
Date	Account	Debit	Credit
Jan 30 2021	Interest Expense	$                         34,730,697
	Discounts on Note Payable		$                         730,697
	Cash		$                   34,000,000
Dec 31 2021	Interest Expense	$                         34,763,578
	Discounts on Note Payable		$                         763,578
	Cash		$                   34,000,000
Dec 31 2021	Fair value adjustment	$                         13,287,541
	Unrealized holding gain		$                   13,287,541
Jan 30 2022	Interest Expense	$                         34,797,939
	Discounts on Note Payable		$                         797,939
	Cash		$                   34,000,000
Dec 31 2022	Interest Expense	$                         34,833,847
	Discounts on Note Payable		$                         833,847
	Cash		$                   34,000,000
Dec 31 2022	Unrealized Holding Loss	$                            4,368,214
	Fair value adjustment		$                     4,368,214