Question

Exercise 14-29 Reporting bonds at fair value [LO14-6]

Federal Semiconductors issued 12% bonds, dated January 1, with a face amount of $840 million on January 1, 2018. The bonds sold for $780,588,787 and mature on December 31, 2037 (20 years). For bonds of similar risk and maturity the market yield was 13%. 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 $760 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 $766 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.

• 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.)

Semiannual Interest Period-End Cash Interest Paid Bond Interest Expense Increase in Balance Carrying Value Fair Value Unrealized Holding Gain (loss) 01/01/2018 $780,588,787 06/30/2018 $50,400,000 $50,738,271 $338,271 780,927,058 12/31/2018 50,400,000 50,760,259 360,259 781,287,317 $760,000,000 $21,287,317 06/30/2019 50,400,000 0 0 12/31/2019 0 0 0 $766,000,000 Bonds Payable Fair Value Adjustment Net Liability(FMV) 01/01/2018 780,588,787 01/01/2018 06/30/2018 338,271 06/30/2018 12/31/2018 360,259 12/31/2018 $21,287,317 781,287,317 21,287,317 $760,000,000 06/30/2019 06/30/2019 12/31/2019 12/31/2019 (21,287,317) 781,287,317

• Calculation

• Journal entry worksheet

• Record the interest expense.

• Note: Enter debits before credits.

  	Date General Journal Debit Credit June 30, 2018

• Record the interest expense.

• Note: Enter debits before credits.

  	Date General Journal Debit Credit December 31, 2018

• Record the fair value adjustment.

Note: Enter debits before credits.

	Date General Journal Debit Credit December 31, 2018

• Record the interest expense.

Note: Enter debits before credits.

	Date General Journal Debit Credit June 30, 2019

• Record the interest expense.

Note: Enter debits before credits.

	Date General Journal Debit Credit December 31, 2019

• Federal determined that one-half of the increase in fair value was due to a decline in general interest rates.

Note: Enter debits before credits.

	Date General Journal Debit Credit December 31, 2019

Answer 1

Semiannual Interest Period-End	Cash Interest Paid	Bond Interest Expense	Increase in Balance	Carrying Value	Fair Value	Unrealized Holding Gain (loss)
01-01-18				780,588,787
06/30/2018	50,400,000	50,738,271	338,271	780,927,058
12/31/2018	50,400,000	50,760,259	360,259	781,287,317	760,000,000	21,287,317
06/30/2019	50,400,000	50,783,676	383,676	781,670,993
12/31/2019	50,400,000	50,808,615	408,615	782,079,607	766,000,000	16,079,607

	Bonds Payable		Fair Value Adjustment		Net Liability(FMV)
01-01-18	780,588,787	01-01-18
06/30/2018	338,271	06/30/2018
12/31/2018	360,259	12/31/2018	21,287,317
	781,287,317		21,287,317		760,000,000
06/30/2019	383,676	06/30/2019
12/31/2019	408,615	12/31/2019	16,079,607	(21,287,317)
	782,079,607		37,366,924	(21,287,317)	766,000,000

Date	General Journal	Debit	Credit
Interest Expense
30-Jun-18	Interest Expense	50,738,271
	Discount on bonds Payable		338,271
	Cash		50,400,000
31-Dec-18	Interest Expense	50,760,259
	Discount on bonds Payable		360,259
	Cash		50,400,000
Fair Value Adjustment
31-Dec-18	Discount on bonds Payable	21,287,317
	Unrealized Holding Gain		21,287,317

Date	General Journal	Debit	Credit
Interest Expense
30-Jun-19	Interest Expense	50,783,676
	Discount on bonds Payable		383,676
	Cash		50,400,000
31-Dec-19	Interest Expense	50,808,615
	Discount on bonds Payable		408,615
	Cash		50,400,000
31-Dec-19	Unrealized Holding Gain	21287317
	Unrealized Holding Gain		16,079,607
	Discount on bonds Payable		5,207,710