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Federal Semiconductors issued 10% bonds, dated January 1, with a face amount of $870 million on...

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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.

Bond Payable:

A bond payable is recorded as a liability (long-term liability) in the balance sheet under the long-term section on the equity and liability side. The decrease or increase in the fair value of the bond payable is recorded as an income (expense) in the income statement and the same is reflected in the balance sheet by increasing (decreasing) the fair value of the bond payable.

Answer and Explanation:

Record journal entry for fair value adjustment as follows: -

Journal Entry
Date Particulars Debit Credit
31/Dec/18 10% Bond Payable $90
Adjustment in fair value ($870 million - $780 million) $90
(Being decrease in the fair value recorded)
31/Dec/19 Adjustment in fair value ($786 million - $780 million) $6
10% Bond Payable $6
(Being increase in the fair value recorded)

Prepare balance sheet presentation as follows: -

Balance Sheet as on 31st December 2018
Long-term Liability
Particulars Amount Amount
10% Bond Payable 870
Less: Fair value adjustment -90
Fair value of 10% Bond Payable 780
Balance Sheet as on 31st December 2019
Long-term Liability
Particulars Amount Amount
10% Bond Payable 870
Less: Fair value adjustment ($6 - $90) -84
Fair value of 10% Bond Payable 786


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