Exercise 14-29 Reporting bonds at fair value [LO14-6]

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