Question

On January 1, 2018, Rapid Airlines issued $255 million of its 8% bonds for $235 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, 2018, the fair value of the bonds was $244 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 entry to record interest on June 30, 2018 (the first interest payment), on December 31, 2018 (the second interest payment) and adjust the bonds to their fair value for presentation in the December 31, 2018, balance sheet. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

Answer 1

Answer
Journal entry
No.	Account Titles and Explanations	Debit	Credit
June 30, 2018	Interest expense ($235 million * 5%)	$1,17,50,000
	To, Discount on bonds payable		$   15,50,000
	To, Cash ($255 million * 4%)		$1,02,00,000
	(To record the first interest payment)
Dec.31,2018	Interest expense [($235 million+$1.55 million)* 5%]	$1,18,27,500
	To, Discount on bonds payable		$   16,27,500
	To, Cash ($255 million * 4%)		$1,02,00,000
	(To record the second interest payment)
Dec.31,2018	Unrealized holding loss- NI	$   10,00,000
	Unrealized holding loss- OCI	$   48,22,500
	To, Fair value adjustment		$   58,22,500
	(To adjust the bonds to their fair value)