Question

Federal Semiconductors issued 8% bonds, dated January 1, with a face amount of $870 million on January 1, 2021. The bonds sold for $789,954,084 and mature on December 31, 2040 (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 entries to record their issuance by Federal on January 1, 2021, interest on June 30, 2021 (at the effective rate) and interest on December 31, 2021 (at the effective rate).
4. At what amount will Federal report the bonds among its liabilities in the December 31, 2021, balance sheet?

Answer 1

Solution 1 to 3:

Journal Entries - Federal Semiconductors
Date	Particulars	Debit	Credit
1-Jan-21	Cash Dr	$789,954,084.00
	Discount on issue of bond Dr	$80,045,916.00
	To Bond Payable		$870,000,000.00
	(To record issue of bond at discount)
30-Jun-21	Interest expense Dr ($789,954,084*9%*6/12)	$35,547,934.00
	To Discount on issue of bond		$747,934.00
	To Cash ($870,000,000*8%*6/12)		$34,800,000.00
	(To record interest expense and discount amortization)
31-Dec-21	Interest expense Dr [($789,954,084 + $747,934)*9%*6/12)	$35,581,591.00
	To Discount on issue of bond		$781,591.00
	To Cash ($870,000,000*8%*6/12)		$34,800,000.00
	(To record interest expense and discount amortization)

Solution 4:

Federal Semiconductors
Balance Sheet (Partial)
As of Dec 31, 2021
Particulars		Amount
Long term liabilities:
Bond Payable	$870,000,000.00
Less: Discount on bond payable	$78,516,391.00
Net Bond Liability		$791,483,609.00