Answer:
1. Prepare the journal entry to record their issuance by Federal on January 1, 2021.
Date Account title Debit ($) Credit ($)
Jan 1, 2021 Cash 739,814,813
Discount on bonds payable 60,185,187
Bonds payable 800,000,000
(To record issue of bonds)
2. Prepare the journal entry to record interest on June 30, 2021 (at the effective rate).
Date Account title Debit ($) Credit ($)
June 30, 2021 Interest expense 44,388,889
Discount on bonds payable 388,889
Cash 44,000,000
(To record payment of semi-annual interest)
3. Prepare the journal entry to record interest on December 31, 2021 (at the effective rate).
Date Account title Debit ($) Credit ($)
Dec 31, 2021 Interest expense 44,412,222
Discount on bonds payable 412,222
Cash 44,000,000
(To record payment of semi-annual interest)
4. The amount that Federal will report for the bonds among its liabilities in the December 31, 2021, balance sheet is $740,615,924
Explanation:
1. Discount on bonds payable = $800 million - $739,814,813 = $60,185,187
2. Cash paid = Face value × stated interest × interest time period
= $800,000,000 × 11% × 0.5
= $44,000,000
Interest expense = price of bonds × market interest rate × interest time period
= $739,814,813 × 12% × 0.5
= $44,388,889
Discount on bonds payable = $44,388,889 - $44,000,000 = $388,889
3. Cash paid = Face value × stated interest × interest time period
= $800,000,000 × 11% × 0.5
= $44,000,000
Interest expense = price of bonds × market interest rate × interest time period
= ($739,814,813 + $388,889) × 12% × 0.5
= $ 44,412,222
Discount on bonds payable = $44,412,222 - $44,000,000 = $412,222
4. Long term liabilities = Bonds payable + Discount on bonds payable June 30 + Discount on bonds payable December 31
= $739,814,813 + $388,889 + $412,222
= $740,615,924
