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 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.)

Semiannual Interest Period-End Cash Interest Paid Bond Interest Expense Increase in Balance Carrying Value Fair Value Unrealized Holding Gain (loss) 01/01/2018 $739,814,813 06/30/2018 $0 0 12/31/2018 0 0 $730,000,000 06/30/2019 0 0 0 12/31/2019 0 0 0 $736,000,000 Bonds Payable Fair Value Adjustment 01/01/2018 739,814,813 01/01/2018 06/30/2018 06/30/2018 12/31/2018 12/31/2018 739,814,813 0 06/30/2019 06/30/2019 12/31/2019 12/31/2019 0 739,814,813

Answer 1

Semiannual Interest Period-End	Cash Interest Paid	Bond Interest Expense	Increase in Balance	Carrying Value	Fair Value	Unrealized Holding Gain (loss)
01/01/2018				$739,814,813
06/30/2018	$48,000,000	$48,000,000	$0	0
12/31/2018			0	0	$730,000,000
06/30/2019	0		0	0
12/31/2019	0		0	0	$736,000,000
	Bonds Payable			Fair Value Adjustment
01/01/2018		739,814,813	01/01/2018
06/30/2018			06/30/2018
12/31/2018			12/31/2018
		739,814,813		0
06/30/2019			06/30/2019
12/31/2019			12/31/2019		0
		739,814,813