Question

On January 1, 2021, Rapid Airlines issued $300 million of its 8% bonds for $276 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 $290 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.)

Answer 1

Answer:

	A	B	C	D
1		PARTICULARS
2		Face Value of Bonds	300000000
3		Interest Rate	=8/100
4		Issued Price	276000000
5		Yeild to Maturity	=10/100
6		Fair Value of Bonds	290000000
7		Increase in Fair Value	1000000
8
9	Date	Accounts Title & Explanation	Debit ($)	Credit ($)
10	June 30	Interest Expense	=C4*C5*1/2
11		To Cash		=C2*3*1/2
12		To Discount on Bonds Payable		=C10-D11
13		(To record the first interest payment )
14	Dec 31	Interest Expense	=(C4+D12)*C5*1/2
15		To Cash		=C2*C3*1/2
16		To Discount on Bonds Payable		=C14-D15
17		(To record the Second interest payment )
18	Dec 31	Unrealized Holding Loss - NI	=C7
19		Unrealized Holding Loss - OCI	=D20-C18
20		Fair Value Adjustment		=C6-(C4+D12+D16)
21		(To Adjust the bonds to their Fair Value)

	A	B	C	D
1		PARTICULARS
2		Face Value of Bonds	300000000
3		Interest Rate	0.08
4		Issued Price	276000000
5		Yeild to Maturity	0.1
6		Fair Value of Bonds	290000000
7		Increase in Fair Value	1000000
8
9	Date	Accounts Title & Explanation	Debit ($)	Credit ($)
10	June 30	Interest Expense	13800000
11		To Cash		450000000
12		To Discount on Bonds Payable		-436200000
13		(To record the first interest payment )
14	Dec 31	Interest Expense	-8010000
15		To Cash		12000000
16		To Discount on Bonds Payable		-20010000
17		(To record the Second interest payment )
18	Dec 31	Unrealized Holding Loss - NI	1000000
19		Unrealized Holding Loss - OCI	469210000
20		Fair Value Adjustment		470210000
21		(To Adjust the bonds to their Fair Value)