Question

On January 1, 2013, Rapid Airlines issued $260 million of its 10% bonds for $244 million. The bonds were priced to yield 12%. 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, 2013, the fair value of the bonds was $249 million as determined by their market value in the over-the-counter market.

  

Required:

1.	Prepare the journal entry to record interest on June 30, 2013 (the first interest payment). (Enter your answers in whole dollars. If no entry is required for a transaction, select "No journal entry required" in the first account field.)

     

2.	Prepare the journal entry to record interest on December 31, 2013 (the second interest payment). (Enter your answers in whole dollars. If no entry is required for a transaction, select "No journal entry required" in the first account field.)

     

3.	Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2013, balance sheet. (Enter your answers in whole dollars. If no entry is required for a transaction, select "No journal entry required" in the first account field.)

     

Answer 1

Date	Account Titles and Explanation	Debit	Credit
2013
Jun-30	Interest expense [($244 million X 12%) X 6/12]	$ 1,46,40,000
	Discount on bonds payable (Bal. Fig.)		$     16,40,000
	Cash [($260 million X 10%) X 6/12]		$ 1,30,00,000
	(Being first interest payment recorded)
Dec-31	Interest expense [($244 million + 1.64 million) X 12%) X 6/12]	$ 1,47,38,400
	Discount on bonds payable (Bal. Fig.)		$     17,38,400
	Cash [($260 million X 10%) X 6/12]		$ 1,30,00,000
	(Being second interest payment recorded)
Dec-31	Unrealized holding loss [$249 million - ($244 million + $1640000 + $1738400)]	$     16,21,600
	Fair value adjustment		$     16,21,600
	(Being bonds adjusted to their fair value)