Question

Federal Semiconductors issued 8% bonds, dated January 1, with a face amount of $750 million on January 1, 2016. The bonds sold for $680,994,058 and mature on December 31, 2032 (20 years). For bonds of similar risk and maturity the market yield was 9%. 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 $670 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 $676 million.

Required:

Complete the below table to record the following journal entries. 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.

Semiannual Interest Period-End Cash Interest Paid Bond Interest Paid Increase in Balance Carrying Value Fair Value Unrealized Holding gain 1/1/2018 680,994,058 6/30/2018 12/31/2018 670,000,000 6/30/2019 12/31/2019 676,000,000 Bonds Payable Fair Value Adjustment 1/1/2018 680994058 1/1/2018 6/30/2018 6/30/2018 12/31/2018 12/31/2018 680994058 0 6/30/2019 6/30/2019 12/31/2019 12/31/2019 0 .

Answer 1