Question

Federal Semiconductors issued 10% bonds, dated January 1, with a face amount of $870 million on January 1, 2018. The bonds sold for $800,199,358 and mature on December 31, 2037 (20 years). For bonds of similar risk and maturity the market yield was 11%. 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 $780 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 $786 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

Date	Cash Interest Paid	Interest Expense	Amort. Of Discount	Carrying Value	Fair Value	Unrealized Holding Gain (Loss)
January 1, 2018				800199358
June 30, 2018	43500000	44010965	510965	800710323
December 31, 2018	43500000	44039068	539068	801249391	780000000	21249391
June 30, 2019	43500000	44068717	568717	801818108
December 31, 2019	43500000	44099996	599996	802418104	786000000	16418104

Note: Discount is amortized using effective interest rate metohd.