Question

Federal Semiconductors issued 8% bonds, dated January 1, with a face amount of $740 million on January 1, 2018. The bonds sold for $671,914,968 and mature on December 31, 2037 (20 years). For bonds of similar risk and maturity the market yield was 9%. Interest is paid semiannually on June 30 and December 31. Required: 1. to 3. Prepare the journal entry to record their issuance by Federal on January 1, 2018, interest on June 30, 2018 (at the effective rate) and interest on December 31, 2018 (at the effective rate). 4. At what amount will Federal report the bonds among its liabilities in the December 31, 2018, balance sheet

Answer 1

1)

Journal entry:

Date

Account titles and explanations

Debit

Credit

January 1, 2018

Cash

$     67,19,14,968

Discount on Bonds Payable

$       6,80,85,032

Bonds Payable

$     74,00,00,000

(To record bonds issuance)

2)

Date

Account titles and explanations

Debit

Credit

Jue 30,2018

Interest expenses

$       3,02,36,174

Discount on Bonds Payable

$           6,36,174

Cash

$       2,96,00,000

(To record interest expenses)

3)

Date

Account titles and explanations

Debit

Credit

December 31, 2018

Interest expenses

$       3,02,64,801

Discount on Bonds Payable

$           6,64,801

Cash

$       2,96,00,000

(To record interest expenses)

4)

Federal will report the bonds among its liabilities in the December 31, 2018, balance sheet at

$   67,32,15,943

Working:

Bonds amortization schedule:

i.

Date

Interest paid

Interest expense

Discount amortised

Unammortised discount

Bonds Carrying Value

January 1, 2018

$     6,80,85,032

$     67,19,14,968

Jue 30,2018

$2,96,00,000

$     3,02,36,174

$           6,36,174

$     6,74,48,858

$     67,25,51,142

December 31, 2018

$2,96,00,000

$     3,02,64,801

$           6,64,801

$     6,67,84,057

$     67,32,15,943

ii.

Semi annual interest paid in cash

=

Par Value * Coupon Interest rate * 6/12

=

$   74,00,00,000

x 8% x 6/12

=

$     2,96,00,000

iii.

Interest expenses:

Jue 30,2018

=

$   67,19,14,968

x 9% x 6/12

=

$     3,02,36,174

December 31, 2018

=

$   67,25,51,142

x 9% x 6/12

=

$     3,02,64,801