Question

In: Accounting

On January 1, 2021, Rapid Airlines issued $255 million of its 8% bonds for $235 million....

On January 1, 2021, 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, 2021, 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 entries to record interest on June 30, 2021 (the first interest payment), on December 31, 2021 (the second interest payment) and to adjust the bonds to their fair value for presentation in the December 31, 2021, balance sheet. (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Solutions

Expert Solution

Particulars Given
Face value of bonds(Jan 1, 2021) 255000000
Interest Rate 8%
Issued price 235000000
Yeild to Maturity 10%
Fair Value of bonds (Dec 31, 2021) 244000000
Increase in Fair Value 1000000

Journal Entries:

Date Account Titles and Explanation Debit Credit
Jun.30 Interest Expense 11750000
Cash 10200000
Discount on Bonds Payable 1550000
(To record the first interest payment)
Dec.31 Interest Expense 11827500
Cash 10200000
Discount on Bonds Payable 1627500
(To record the second interest payment)
Dec.31 Unrealized Holding Loss - NI 1000000
Unrealized Holding Loss - OCI 4822500
Fair Value Adjustment 5822500
(To adjust the bonds to their Fair value)

Workings:

First Interest Payment:

1. Interest expense = Issued price * Yeild to maturity * 6/12

=235000000 * 10% * 1/2

= 23500000* 0.5

= 11750000

2.Cash = Face value of bonds * Interest rate * 1/2

= 255000000 * 8% * 1/2

= 20400000 *0.5

= 10200000

3.Discount on Bonds Payable = Interest expense - Cash

=117500000 - 10200000

=1550000

Second Interest Payment:

1. Interest expense =[ (Issued price + Discount on Bonds Payable)* Yeild to maturity * 6/12]

=235000000 + 150000 * 10% * 1/2

= 23650000* 0.5

= 11827500

2.Cash = Face value of bonds * Interest rate * 1/2

= 255000000 * 8% * 1/2

= 20400000 *0.5

= 10200000

3.Discount on Bonds Payable = Interest expense - Cash

=118275000 - 10200000

=1627500.

Adjustment of bonds:

1. Unrealized Holding loss-NI = Interest on fairvalue

=1000000

2. Unrealized Holding loss-OCI = Fair value adjustment - Unrealized Holding loss-NI

= 1000000 - 5822500

= 4822500

3. Fair value adjustment = Fair value of Bonds - (Issued price + Discount on bond payable + Discount on bond payable)

= 244000000 - (235000000+1550000+1627500)

= 244000000 - 238177500

= 5822500.

Please up vote, Thank You !


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