Question

Exercise 14-29 Reporting bonds at fair value [LO14-6]

Federal Semiconductors issued 12% bonds, dated January 1, with a face amount of $790 million on January 1, 2018. The bonds sold for $734,125,169 and mature on December 31, 2037 (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, 2018, the fair value of the bonds was $720 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 $726 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 & 2.

The bonds have been issued at a discount of $55,874,831. This discount is to be amortized over the life of the bond i.e.,20 years.

From the table below , we can see that the vaue of the bonds at Dec.31, 2018is $734,782,120 and at Dec.31,2019 $735,527,250.

The journal entries ill be as follows.

Date	Account title	Debit	credit
Dec.31, 2018	Unrealized holding loss	14782120
	Fair Value adjustment (734,782,120 - 720,000,000)		14782120
	(To record the bonds at fair value)
Jan.1, 2019	Fair Value adjustment (734,782,120 - 720,000,000)	14782120
	Unrealized holding loss		14782120
	(Reversal of the entry for fair value made on Dec.31,2018)
Dec.31, 2019	Unrealized holding loss	9527250
	Fair Value adjustment (735,527,250 - 726,000,000)		9527250
	(To record the bonds at fair value)