Question

Federal Semiconductors issued 11% bonds, dated January 1, with a face amount of $800 million on January 1, 2021. The bonds sold for $739,814,813 and mature on December 31, 2040 (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, 2021, the fair value of the bonds was $730 million as determined by their market value in the over-the-counter market. Assume the fair value of the bonds on December 31, 2022 had risen to $736 million.

Complete the below table to record the following journal entries.
1. & 2. Prepare the journal entries to adjust the bonds to their fair value for presentation in the December 31, 2021, balance sheet, and adjust the bonds to their fair value for presentation in the December 31, 2022, balance sheet. Federal determined that none of the change in fair value in 2021 was due to a decline in general interest rates and one-half of the increase in fair value in 2022 was due to a decline in general interest rates.

Answer 1

1. Calulation

Federal Semiconductors
Semiannual interest period	Cash interest paid	Bond interest expense	Increase in balance	Carrying value	Fair value	Unrealized holding gain (loss)
January 1,2021				739,814,813
June 30,2021	800,000,000*11%/2 = 44,000,000	739,814,813*12%/2 =44,388,889	44,388,889-44,000,000 =388,889	739,814,813+388,889 =740,203,702
December 31,2021	800,000,000*11%/2 = 44,000,000	740,203,702*12%/2 =44,412,222	44,412,222-44,000,000 =412,222	740,203,702+412,222 =740,615,924	730,000,000	740,615,924-730,000,000 =10,615,924
June 30,2022	800,000,000*11%/2 = 44,000,000	740,615,924*12%/2 =44,436,955	44,436,955-44,000,000 =436,955	740,615,924+436,955 =741,052,879
December 31,2022	800,000,000*11%/2 = 44,000,000	741,052,879*12%/2 =44,463,173	44,463,173-44,000,000 =463,173	741,052,879+463,173 =741,516,052	736,000,000	741,516,052-736,000,000 =5,516,052
	Bonds Payable		Fair Value adjustment
January 1,2021		739,814,813	January 1,2021
June 30,2021		388,889	June 30,2021
December 31,2021		412,222	December 31,2021	10,615,924
		739,814,813+388,889+412,222 =740,615,924		10,615,924
June 30,2022		436,955	June 30,2022
December 31,2022		463,173	December 31,2022	5,516,052	5,516,052-10,615,924 =(5,099,872)
		740,615,924+436,955+463,173 =741,516,052

2. Journal Entries

Date	Account titles and Explanation	Debit	Credit
June 30,2021	Interest expense	44,388,889
	Discounts on bonds payable		388,889
	Cash		44,000,000
December 31,2021	Interest expense	44,412,222
	Discounts on bonds payable		412,222
	Cash		44,000,000
December 31,2021	Fair value adjustment	10,615,924
	Unrealized holding gain - OCI		10,615,924
June 30,2022	Interest expense	44,436,955
	Discounts on bonds payable		436,955
	Cash		44,000,000
December 31,2022	Interest expense	44,463,173
	Discounts on bonds payable		463,173
	Cash		44,000,000
December 31,2022	Unrealized holding loss -NI [(736,000,000-730,000,000) *1/2 ]	3,000,000
	Unrealized holding loss - OCI (5,099,872 - 3,000,000)	2,099,872
	Fair value adjustment		5,099,872