Question

Federal Semiconductors issued 11% bonds, dated January 1, with a face amount of $830 million on January 1, 2018. The bonds sold for $767,557,868 and mature on December 31, 2037 (20 years). For bonds of similar risk and maturity the market yield was 12%. 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, 2018, the fair value of the bonds was $750 million as determined by their market value in the over-the-counter market. Assume the fair value of the bonds on December 31, 2019 had risen to $756 million.

Required:

Complete the below table to record the following journal entries.
1. & 2. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2018, balance sheet, and adjust the bonds to their fair value for presentation in the December 31, 2019, balance sheet. Federal determined that one-half of the increase in fair value was due to a decline in general interest rates.

Answer 1

1)

Note : As the Table is not visible, I have created a Table based on data given in the question

				Amount in US $
Half-Year ending	Interest paid -Cash-See Note 1	Interest Expense - Bond - See Note 2	Increase/ (Decrease) in Balance	Carrying Value	Fair Value - Given	Unrealized Holding Gain/Loss
Comun Reference-->	1	2	3.= 2-1	4= Prev Carrying Value + Incr./(Decr.)	5	6=4-5
Jan 1, 2018				76,75,57,868
June 30, 2018	4,56,50,000	4,60,53,472	4,03,472	76,79,61,340
Dec 31, 2018	4,56,50,000	4,60,77,680	4,27,680	76,83,89,020	75,00,00,000	1,83,89,020
June 30, 2019	4,56,50,000	4,61,03,341	4,53,341	76,88,42,362
Dec 31, 2019	4,56,50,000	4,61,30,542	4,80,542	76,93,22,903	75,60,00,000	1,33,22,903
Half-Year ending	Bonds Payable		Half-Year ending	Fair Value Adjustment		Net Liability (FMV)
Jan 1, 2018		76,75,57,868	Jan 1, 2018
June 30, 2018		4,03,472	June 30, 2018
Dec 31, 2018		4,27,680	Dec 31, 2018
Balance 31/12/2018		76,83,89,020			1,83,89,020	75,00,00,000
June 30, 2019		4,53,341	June 30, 2019
Dec 31, 2019		4,80,542	Dec 31, 2019
Balance 31/12/2019		76,93,22,903			1,33,22,903	-50,66,117
						(Diff in Fair Value Adj as at 31/12.2019 and 31/12/2018)

Q 2)	Journal Entries
Date	Account Head	Debit Amount $	Credit Amount $
June 30, 2018	Interest Expense	4,60,53,472
	Discount on Bonds Payable		4,03,472
	Cash		4,56,50,000
	(Being the entry to record the Interest on Bonds payable, Interest Paid by Cash, and the difference representing the discount on Bonds payable)
Dec 31, 2018	Interest Expense	4,60,77,680
	Discount on Bonds Payable		4,27,680
	Cash		4,56,50,000
	(Being the entry to record the Interest on Bonds payable, Interest Paid by Cash, and the difference representing the discount on Bonds payable)
Dec 31, 2018	Fair Value Adjustment	1,83,89,020
	Unrealized Holding Gain - Other Comprehensive Income (OCI)		1,83,89,020
	(Being the entry to record the Fair Value Adjustment needed (Debit). This represents difference in Book Value as at Dec 31, 2018 and the Fair Value as at Dec 31, 2018 as given in question. This amount is recognized as a Gain in OCI.It should be noted that a decrease in value of an asset represents a loss, whereas, a decrease in value of a liability represents a gain. In the Balance Sheet, the Bonds, will reported at their fair value of $ 75,00,00,000 in Long Term Liabilities).
June 30, 2019	Interest Expense	4,61,03,341
	Discount on Bonds Payable		4,56,50,000
	Cash		4,53,341
	(Being the entry to record the Interest on Bonds payable, Interest Paid by Cash, and the difference representing the discount on Bonds payable)
Dec 31, 2019	Interest Expense	4,61,30,542
	Discount on Bonds Payable		4,56,50,000
	Cash		4,80,542
	(Being the entry to record the Interest on Bonds payable, Interest Paid by Cash, and the difference representing the discount on Bonds payable)
Dec 31, 2019	Unrealized Holding Loss- Net Income (NI) - Diff in Fair Value as at Dec 31, 2018 and 2019 ($ 75,60,00,000-$75,00,00,000)*50%	30,00,000
	Unrealized Holding Loss- OCI - See Note below	20,66,117
	Fair Value Adjustment		50,66,117
	(Being the difference in Fair Value Adjustment balance needed on Dec 31, 2019 and Dec 31, 2018.

Note
As the change in Fair Value ( Dec 31, 2018 and 2019, is on account of a change in interest rates, Federal can assume that any remaining change will be as a consequence of credit risk. A change in Fair Value as a consequence of a change in interest rates related to Bonds, is reported in Other Comprehensive Income (OCI) - Statement of Comprehensive Income. It should be noted that Credit Risk represents the risk that a Bond Holder will not received the interest and maturity amount on the due date.Federal will, therefore, record the loss of $ 20,66,117 in OCI in the Statement of Comprehensive Income for the year ended Dec 31, 2019.

Note 1

Note 1	Interest paid in Cash
		Amount $
1	Face Value of 11% Bonds	83,00,00,000
2	Interest @11% p.a for 6 months	4,56,50,000
	11%*6/128 $83,00,00,000

Note 2:

	Bond Interest calculation	Amount $
June 30, 2018
1	Carrying Value of Bonds on 1.1.2018	76,75,57,868
2	Market Yield on Bonds @12% p.a for 6 months	4,60,53,472.08
	12%*6/12*$76,75,57,868
3	Less Cash Interest Paid	4,56,50,000
4	Increase/Decrease in Interest (2-3)	4,03,472.08
5	Carrying Value on 30.6.2018 (1+4)	76,79,61,340.08
Dec 31, 2018
1	Carrying Value of Bonds on 30.6.2018	76,79,61,340
2	Market Yield on Bonds @12% p.a for 6 months	4,60,77,680.40
	12%*6/12*$76,79,61,340
3	Less Cash Interest Paid	4,56,50,000
4	Increase/Decrease in Interest (2-3)	4,27,680.40
5	Carrying Value on 31.12.2018 (1+4)	76,83,89,020.48
June 30, 2019
1	Carrying Value of Bonds on 31.12.2018	76,83,89,020
2	Market Yield on Bonds @12% p.a for 6 months	4,61,03,341.23
	12%*6/12*$76,83,89,020
3	Less Cash Interest Paid	4,56,50,000
4	Increase/Decrease in Interest (2-3)	4,53,341.23
5	Carrying Value on 30.6.2019 (1+4)	76,88,42,361.71
Dec 31, 2019
1	Carrying Value of Bonds on 30.6.2019	76,88,42,362
2	Market Yield on Bonds @12% p.a for 6 months	4,61,30,541.70
	12%*6/12*$76,83,89,020
3	Less Cash Interest Paid	4,56,50,000
4	Increase/Decrease in Interest (2-3)	4,80,541.70
5	Carrying Value on 31.12.2019 (1+4)	76,93,22,903.42