Question

Federal Semiconductors issued 8% bonds, dated January 1, with a face amount of $850 million on January 1, 2018. The bonds sold for $771,793,266 and mature on December 31, 2037 (20 years). For bonds of similar risk and maturity the market yield was 9%. 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 $760 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 $766 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.

semi-annual interest period-end	cash interest paid	bond interest expense	increase in balance	carrying value	far value	unrealized holding gain/loss
01/01/2018				771,793,266
06/30/2018	?	?
12/31/2018	?	?			760,000,000	?
06/302019		?
12/31/2019		?			766,000,000	?
	Bonds Payable	BP		Fair Value Adjustment	FVA
01/01/2018		771,793,266
06/30/2018
12/31/2018
		771,793,266
06/30/2019
12/31/2019
		771,793,226

Answer 1

Semi-Annual Interst Period End	Cash Interest Paid (face amount*4%)	Bonds Interest Expenses (Carrying value*4.5%)	Increase In Balance (Bond Interest - Cash interest)	Carrying value	Fair Value	Unrealized Holding Gain/Loss (Carrying value - fair value)	Bonds Payble	Fair Value Adjustment
01/01/2018				771,793,266			771,793,266
06/30/2018	34,000,000	34,730,697	730,697	772,523,963			730,697
12/31/2018	34,000,000	34,763,578	763,578	773,287,541	760,000,000	13,287,541	763,578
							773,287,541	13,287,541
06/30/2019	34,000,000	34,797,939	797,939	774,085,480			797,939
12/31/2019	34,000,000	34,833,847	833,847	774,919,327	766,000,000	(8,919,327 - 13,287,541) = (4,368,214)	833,847	(4,368,214)
							774,919,327

Note : Interest rate will become half as they paid interest semi-annually.

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