Question

Federal Semiconductors issued 12% bonds, dated January 1, with a face amount of $890 million on January 1, 2016. The bonds sold for $827,052,405 and mature on December 31, 2032 (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, 2016, the fair value of the bonds was $810 million as determined by their market value in the over-the-counter market. Assume the fair value of the bonds on December 31, 2017 had risen to $816 million. Required: Complete the below table to record the following journal entries (Enter your answers in whole dollars.) 1. & 2. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2016 and on December 31, 2017, balance sheet. Federal determined that one-half of the increase in fair value was due to a decline in general interest rates. (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

Journal Entries
Date	Issue of Bonds	Dr ($)	Cr($)
issue 1.1.16	Cash	82,70,52,405
	Discount on Bonds	6,29,47,595
	Bonds payable		89,00,00,000
30.06.2016	Interest Expense	5,37,58,406
	Cash		5,34,00,000
	Discount on Bond		3,58,406
31.12.2016	Interest Expense	5,37,81,703
	Cash		5,34,00,000
	Discount on Bond		3,81,703
31.12.2016	Fair Value Adj.	1,77,92,514
	Unrealised Holding gain		1,77,92,514
30.06.2017	Interest Expense	5,38,06,513
	Cash		5,34,00,000
	Discount on Bond		4,06,513
31.12.2017	Interest Expense	5,38,32,937
	Cash		5,34,00,000
	Discount on Bond		4,32,937
31.12.2017	Unrealised Holding Loss	51,60,550
	Fair Value Adj.		51,60,550
Date Interest Payment Interest Expense Amortization Disc bala Bond Payable BV F=(A*12%*6/12) G= (K*13%*6/12) H=(G-F) I J K =( J-I ) 01.01.2016 6,29,47,595    89,00,00,000            82,70,52,405 30.06.2016              5,34,00,000             5,37,58,406           3,58,406 6,25,89,189    89,00,00,000            82,74,10,811 31.12.2016              5,34,00,000             5,37,81,703           3,81,703 6,22,07,486    89,00,00,000            82,77,92,514 30.06.2017              5,34,00,000             5,38,06,513           4,06,513 6,18,00,973    89,00,00,000            82,81,99,027 31.12.2017              5,34,00,000             5,38,32,937           4,32,937 6,13,68,036    89,00,00,000            82,86,31,964

	Calculations
Date	Particulars	Amount ($)
01.01.2016	Initial Issue Price	82,70,52,405
2016	Increase from Discount Amortization (358406+381703)	7,40,109
31.12.2016	Book Value	82,77,92,514
31.12.2016	Fair Value	81,00,00,000
	Fair Value Adjustment needed	1,77,92,514
01.01.2017	Initial Amortised BV	82,77,92,514
2017	Increase from Discount Amortization (406513+432937)	8,39,450
31.12.2017	Book Value	82,86,31,964
31.12.2017	Fair Value	81,60,00,000
	Fair Value Adjustment needed	1,26,31,964
	Less : Current Fair Value Balance	1,77,92,514
	Change in Fair Value Adjustment	-51,60,550

	Balance Sheet Presentation (Long Term Liabilities)
Date		Amount ($)
01.01.2016	Bonds Payable	89,00,00,000
31.12.2016	Less : Unamorised Discount	6,22,07,486
31.12.2016	Book Value	82,77,92,514
31.12.2016	Less : Fair Value Adjustment	1,77,92,514
31.12.2016	Fair Value	81,00,00,000
01.01.2016	Bonds Payable	89,00,00,000
31.12.2016	Less : Unamorised Discount	6,13,68,036
31.12.2016	Book Value	82,86,31,964
31.12.2016	Less : Fair Value Adjustment	1,26,31,964
31.12.2016	Fair Value	81,60,00,000