Question

Federal Semiconductors issued 11% bonds, dated January 1, with a face amount of $800 million on January 1, 2018. The bonds sold for $739,814,813 and mature on December 31, 2037 (20 years). For bonds of similar risk and maturity the market yield was 12%. 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, 2018, the fair value of the bonds was $730 million as determined by their market value in the over-the-counter market. Assume the fair value of the bonds on December 31, 2019 had risen to $736 million Required: Complete the below table to record the following journal entries. 1. & 2. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2018, balance sheet, and adjust the bonds to their fair value for presentation in the December 31, 2019, balance sheet. Federal determined that one-half of the increase in fair value was due to a decline in general interest rates. Complete this question by entering your answers in the tabs below. Calculation General Journal Complete the below table to record the following journal entries. (Negative amount should be indicated by a minus sign. Round final answers to the nearest whole dollars.) Cash Interest Bond Interest Paid Expense Unrealized Holding Gain (loss) Semiannual Interest Period-End 01/01/2018 06/30/2018 12/31/2018 06/30/2019 12/31/2019 Increase in Carrying Value Fair Value Balance $ 739,814,813 $ 00 0 $ 730,000,000 0 $ 736,000,000 Fair Value Adjustment 01/01/2018 06/30/2018 12/31/2018 Bonds Payable 739,814,813 01/01/2018 06/30/2018 12/31/2018 739,814,813 06/30/2019 12/31/2019 739,814,813 06/30/2019 12/31/2019 0

Answer 1

Please find below table useful to compute desired results: -

А i Face Amount 2 Sold for 3 Market Yield 4 Bond Interest rate 5 Fair Value of bonds 6 Risen Fair Value of Bonds 800000000 739814813 =12/100 =11/100 730000000 736000000 8 Federal Semiconductors 9 Semiannual Interest Period-end Cash Interest Paid Bond Interest Expense Increase in Balance Carrying Value Fair Value Unrealized holding Gain(loss) 10 1 Jan. 2018 =B2 11 30 Jun. 2018 =B1*B4/2 =B2*B3/2 =C11-B11 =E10+D11 12 31 Dec. 2018 =B1*B4/2 =(E10+D11)*B3/2 =C12-B12 =E11+D12 =B5 =E12-F12 13 30 Jun. 2019 =B1%B4/2 =E11+D12)*B3/2 =C13-B13 =E12+D13 14 31 Dec. 2019 =B1*B4/2 =(E12+D13)*B3/2 =C14-B14 1=E13+D14 =B6 =E14-F14 15 16 Bonds Payable Fair Value Adjustment 17 1 Jan. 2018 =B2 |1 Jan. 2018 18 30 Jun. 2018 =D11 30 Jun. 2018 19 31 Dec. 2018 =D12 31 Dec. 2018 =G12 20 =SUM(C17:C19) =SUM(E17E19) 21 30 Jun. 2019 =D13 30 Jun. 2019 22 31 Dec. 2019 =D14 31 Dec. 2019 =G14-G12 =C20+C21+C22 =G14 24 23

L Credit 1 2 Date Account titles and Explanation Debit 30 Jun 2018 Interest Expense =C11 Discount on bonds payable Cash =K2-L4 =B11 =C12 31 Dec. 2018 Interest expense Discount on bonds payable Cash =KO-L8 =B12 31 Dec. 2018 Fair value adjustment Unrealized holding gain-OCI =K10 =C13 30 Jun. 2019 Interest expense Discount on bonds payable Cash =K13-L 15 =B13 =C14 31 Dec. 2019 Interest expense Discount on bonds payable =K17-L19 =B14 Cash 31 Dec. 2019 Unrealized holding loss- NI =(B6-B5)*1/2 Unrealized holding loss-OCI=L23-K21 Fair Value adjustment =-F22

End results would be as follows: -

А i Face Amount 2 Sold for 3 Market Yield 4 Bond Interest rate 5 Fair Value of bonds 6 Risen Fair Value of Bonds 800,000,000 739.814.813 12% 11% 730,000,000 736,000,000 Federal Semiconductors Bond Interest Expense Increase in Balance Cash Interest Paid Fair Value Unrealized holding Gain(loss) 8 9 Semiannual Interest Period-end 10 1 Jan. 2018 11 30 Jun. 2018 12 31 Dec. 2018 13 30 Jun. 2019 14 31 Dec. 2019 730.000.000 44,000,000 44.000.000 44.000.000 44,000,000 10,615,924 Carrying Value 739.814.813 740.203,702 740.615.924 741,052,879 741,516,052 44.388.889 44.412.222 44,436,955 44.463,173 388.889 412,222 436,955 463,173 736,000,000 5,516,052 15 Bonds Payable Fair Value Adjustment 16 17 1 Jan. 2018 18 30 Jun 2018 19 31 Dec. 2018 20 21 30 Jun 2019 22 31 Dec. 2019 739,814.813 1 Jan. 2018 388.889 30 Jun. 2018 412.222 31 Dec. 2018 740,615,924 436.955 30 Jun. 2019 463,173 31 Dec. 2019 741,516,052 10,615,924 10.615,924 730.000.000 (5,099,872) 23 5,516,052 24

L Credit 1 K Debit 44,388,889 Date 30 Jun. 2018 2 Account titles and Explanation Interest Expense Discount on bonds payable Cash 388,889 44,000,000 31 Dec. 2018 44,412,222 Interest expense Discount on bonds payable Cash 412.222 44,000,000 | 31 Dec. 2018 10,615,924 Fair value adjustment Unrealized holding gain-OCI 10,615,924 30 Jun. 2019 44,436,955 Interest expense Discount on bonds payable Cash 436,955 44,000,000 31 Dec. 2019 44.463,173 Interest expense Discount on bonds payable Cash 463,173 44.000.000 31 Dec. 2019 Unrealized holding loss- NI Unrealized holding loss-OCI Fair Value adjustment 3,000,000 2,099,872 5,099,872