Question

Federal Semiconductors issued 11% bonds, dated January 1, with a face amount of $830 million on January 1, 2021. The bonds sold for $767,557,868 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 $750 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 $756 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

Answer:

discount on bonds payable 18,383,020.48 debit

other comprehensive income 18,383,020.48 credit

--to adjust Bonds at 12/31/2021 market value --

other comprehensive income  4.739.000‬ debit

    discount on bonds payable   4.739.000‬ credit

--to adjust Bonds at 12/31/2022 market value --

Explanation:

We solve for the book value at year-end using effective rate

First year:

First payment

830,000,000 x 5.5% = 45,650,000

767,557,868  x 6.0% = 46,053,472.08

Amortization              403,472.08

Second Payment

830,000,000 x 5.5% =                         45,650,000

(767,557,868 + 403,472.08)  x 6.0% = 46,077,680.4

Amortization               427680.4

Carrying value at year-end

767,557,868 + 403,472.08 + 427,680.40 = 768,389,020.48

We need to recognize a deferred gain for the difference between these and the 750,000,000 market value at December 31th

which is $ 18,383,020.48 as these as not been realized it will be part of other comprehensive income

We will increase the discount to adjust the bonds payable account net balance.

Second year:

We repeat the process

First Payment:

830,000,000 x 5.5% = 45,650,000

Interest expense 750,000,000 x 6% = 45,000,000

Amortization  650000

Carrying value 750,000,000 + 650,000 = 750,650,000

Second Payment:

830,000,000 x 5.5% = 45,650,000

750,650,000 x 6% = 45,039,000

Amortization 611000

Carrying Value 750,650,000 + 611,000 = 751,261,000

Wer now compare this with the 756,000,000

as now the debt of the company has increased we are going to decrease the discounttand recognize a deferred loss through other comprehensive income as it wasn't realized

756,000,000 - 751,261,000 = 4.739.000‬