Federal Semiconductors issued 12% bonds, dated January 1,

Federal Semiconductors issued 12% bonds, dated January 1, with a face amount of $840 million on January 1, 2018. The bonds sold for $780,588,787 and mature on December 31, 2037 (20 years). For bonds of similar risk and maturity the market yield was 13%. 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.

  • Calculation
  • General Journal

Complete the below table to record the following journal entries. (Negative amount should be indicated by a minus sign. Round final answers to the nearest whole dollars.)

Semiannual Interest Period-End Cash Interest Paid Bond Interest Expense Increase in Balance Carrying Value Fair Value Unrealized Holding Gain (loss)
01/01/2018 $780,588,787
06/30/2018 $50,400,000 $50,738,271 $338,271 780,927,058
12/31/2018 50,400,000 50,760,259 360,259 781,287,317 $760,000,000 $21,287,317
06/30/2019 50,400,000 0 0
12/31/2019 0 0 0 $766,000,000
Bonds Payable Fair Value Adjustment Net Liability(FMV)
01/01/2018 780,588,787 01/01/2018
06/30/2018 338,271 06/30/2018
12/31/2018 360,259 12/31/2018 $21,287,317
781,287,317 21,287,317 $760,000,000
06/30/2019 06/30/2019
12/31/2019 12/31/2019 (21,287,317)
781,287,317
  • Calculation
  • Journal entry worksheet

  • Record the interest expense.
  • Note: Enter debits before credits.

    Date General Journal Debit Credit
    June 30, 2018
  • Record the interest expense.
  • Note: Enter debits before credits.

    Date General Journal Debit Credit
    December 31, 2018
  • Record the fair value adjustment.

Note: Enter debits before credits.

Date General Journal Debit Credit
December 31, 2018

  • Record the interest expense.

Note: Enter debits before credits.

Date General Journal Debit Credit
June 30, 2019

  • Record the interest expense.

Note: Enter debits before credits.

Date General Journal Debit Credit
December 31, 2019

  • Federal determined that one-half of the increase in fair value was due to a decline in general interest rates.

Note: Enter debits before credits.

Date General Journal Debit Credit
December 31, 2019

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