Question

On January 1, 2021, Rapid Airlines issued $290 million of its 10% bonds for $268 million. The bonds were priced to yield 12%. Interest is payable semiannually on June 30 and December 31. Rapid Airlines records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2021, the fair value of the bonds was $279 million as determined by their market value in the over-the-counter market. Rapid determined that $1,000,000 of the increase in fair value was due to a decline in general interest rates.

Required:

1. to 3. Prepare the journal entries to record interest on June 30, 2021 (the first interest payment), on December 31, 2021 (the second interest payment) and to adjust the bonds to their fair value for presentation in the December 31, 2021, balance sheet. (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Ans: Journal Entry

Date	Account title and explanation	Debit($)	Credit($)
June 30,2021	Interest Expense[268*12%*6/12]	16,080,000
	Cash[290*6/12*10%]		14,500,000
	Discount on Bonds Payable		1,580,000
	[to record first interest payment]
Dec 31,2021	Interest Expense{268M+1.58 Million]*12%*6/12	16,174,800
	Cash[290M*6/12*15]		14,500,000
	Discount on Bonds Payable		1,674,800
	[ to record second interest payment]
Dec 31,2021	Unrealized Holding Loss-NI	1,000,000
	Unrealized Holding Loss-OCI	6,745,200
	Fair Value Adjustment		7,745,200
	{to adjust bonds to their fair value]

Fair value adjustment= Book Value of bonds at Dec 31,2021-Fair value of Bonds At Dec 31,2021

=>[ 268,000,000+1,580,000+1,674,800]-279,000,000

=> 271,254,800-279,000,000

=> [7,745,200]