Question

Federal Semiconductors issued 12% bonds, dated January 1, with a face amount of $100 million on January 1, 2018. The 20-year bonds sold for $105.477 million and mature in 2035. For bonds of similar risk and maturity the market yield was 11%. Interest is paid annually on December 31. Federal uses the effective interest method, and elected to report these bonds at their fair value. On December 31, 2018, the fair value of the bonds was $103.050 million (OTC market) because of an increase in the company’s financial risk.
a. Prepare the journal entry for the interest payment on December 31, 2018.




b. Calculate the PV of the remaining payments (CV of B/P) as of December 31, 2016 and prepare the journal entry to adjust the bonds to their fair value for presentation on the December 31, 2018 balance sheet.
FVadjustment acct
CV of B/P, 1/1/2018 $105,477,000 - $105,477,000 (MV) = (beginning bal)
2018 ____ amortization __________
CV of B/P, 12/31/2018 - $103,050,000 (MV) = (desired end bal)
increase/decrease

12/31/2018 JE: _________________________________________________

___________________________________________________


c. Assume that Federal has already recorded its 2019 interest payment and the fair value of the bonds on December 31, 2019 had increased to $107.200 million mainly because of a decrease in general interest rates. Calculate the PV of the remaining payments (CV of B/P) as of December 31, 2019 and prepare the journal entry to adjust the bonds to their fair value for presentation on the December 31, 2019 balance sheet.
FVadjustment acct
CV of B/P, 12/31/2018 - $103,050,000 (MV) = (beginning bal)
2019 ___ amortization __________
CV of B/P, 12/31/2019 - $107,200,000 (MV) = (desired end bal)
increase/decrease

12/31/2019 JE: _______________________________________________ ___________________________________________________

Answer 1

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