Question

On January 1, 2021, Rapid Airlines issued $240 million of its 8% bonds for $221 million. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. Rapid Airlines records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2021, the fair value of the bonds was $229 million as determined by their market value in the over-the-counter market. Rapid determined that $1,000,000 of the increase in fair value was due to a decline in general interest rates.

Required:

1. to 3. Prepare the journal entries to record interest on June 30, 2021 (the first interest payment), on December 31, 2021 (the second interest payment) and to adjust the bonds to their fair value for presentation in the December 31, 2021, balance sheet

Answer 1

Please find below table useful to compute desired results: -

B Particulars Given Face value of Bonds 240000000 Interest Rate =8/100 Issued price 221000000 Yeild to Maturity =10/100 Fair Value of Bonds 229000000 Increase in Fair Value 1000000 Credit =C2*C3*1/2 =C10-D11 13 9 Date Account Titles and Explanation Debit 10 Jun. 30 Interest Expense =C4%C5*1/2 11 Cash 12 Discount on Bonds Payable (to record the first interest payment) 14 Dec. 31 Interest Expense =(C4+D12)*C5*1/2 15 Cash 16 Discount on Bonds Payable (to record the second interest payment) 18 Dec. 31 |Unrealized Holding Loss - NI =C7 19 Unrealized Holding Loss - OCI =D20-C18 Fair Value Adjustment (to adjust the bonds to their Fair value) =C2*C3*1/2 =C14-D15 =C6-(C4+D12+D16)

End results would be as follows: -

Particulars Given Face value of Bonds Interest Rate Issued price Yeild to Maturity Fair Value of Bonds Increase in Fair Value 240,000,000 8% 221,000,000 10% 229,000,000 1,000,000 Credit 9,600,000 1,450,000 9 Date Account Titles and Explanation Debit 10 Jun. 30 Interest Expense 11,050,000 Cash Discount on Bonds Payable (to record the first interest payment) Dec. 31 Interest Expense 11,122,500 Cash Discount on Bonds Payable (to record the second interest payment) Dec. 31 Unrealized Holding Loss - NI 1,000,000 Unrealized Holding Loss - OCI 4,027,500 Fair Value Adjustment (to adjust the bonds to their Fair value) 9,600,000 1,522,500 5,027,500