Federal Semiconductors issued 10% bonds, dated January 1, with a face amount of
ID: 2337765 • Letter: F
Question
Federal Semiconductors issued 10% bonds, dated January 1, with a face amount of $870 million on January 1, 2018. The bonds sold for $800,199,358 and mature on December 31, 2037 (20 years). For bonds of similar risk and maturity the market yield was 11%. 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 $780 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 $786 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.
Explanation / Answer
Date
Cash Interest Paid
Interest Expense
Amort. Of Discount
Carrying Value
Fair Value
Unrealized Holding Gain (Loss)
January 1, 2018
800199358
June 30, 2018
43500000
44010965
510965
800710323
December 31, 2018
43500000
44039068
539068
801249391
780000000
21249391
June 30, 2019
43500000
44068717
568717
801818108
December 31, 2019
43500000
44099996
599996
802418104
786000000
16418104
Note: Discount is amortized using effective interest rate metohd.
Date
Cash Interest Paid
Interest Expense
Amort. Of Discount
Carrying Value
Fair Value
Unrealized Holding Gain (Loss)
January 1, 2018
800199358
June 30, 2018
43500000
44010965
510965
800710323
December 31, 2018
43500000
44039068
539068
801249391
780000000
21249391
June 30, 2019
43500000
44068717
568717
801818108
December 31, 2019
43500000
44099996
599996
802418104
786000000
16418104
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