On January 1, 2018, Rapid Airlines issued $250 million of its 6% bonds for $229

Question

On January 1, 2018, Rapid Airlines issued $250 million of its 6% bonds for $229 million. The bonds were priced to yield 8%. Interest is payable semiannually on June 30 and December 31. Rapid Airlines records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2018, the fair value of the bonds was $239 million as determined by their market value in the over-the-counter market. Rapid determined that $1,000,000 of the increase in fair value was due to a decline in general interest rates Reguired: 1. to 3. Prepare the journal entry to record interest on June 30, 2018 (the first interest payment), on December 31, 2018 (the second interest payment) and adjust the bonds to their fair value for presentation in the December 31, 2018, balance sheet. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) 0 Date General Journal Debit Credit June 30, 2018 Interest expense Discount on bonds payable Cash December 31, 2018 2 Interest expense Discount on bonds payable Cash December 31 2018 1,000,000 4,838,000 Unrealized holding loss-NI Unrealized holding loss-oCI Fair value adjustment 5,838,000

Explanation / Answer

SOLUTION

* The interest entries increased the book value from $229,000,000 to $232,386,400. To increase the book value to $249,000,000, Rapid needed the following entry:Fair value adjustment ($239,000,000 - $232,386,400) = $6,613,600

Date Account titles and Explanation Debit ($) Credit ($) June 30, 2018 Interest expense ($229 million * 4%) 9,160,000 Discount on bonds payable 1,660,000 Cash ($250 million * 3%) 7,500,000 (To record the first interest payment) Dec.31,2018 Interest expense [($229 million+$1.66 million)* 4%] 9,226,400 Discount on bonds payable 1,726,400 Cash ($250 million * 3%) 7,500,000 (To record the second interest payment) Dec.31,2018 Unrealized holding loss- NI 1,000,000 Unrealized holding loss- OCI 5,613,600 Fair value adjustment 6,613,600 (To adjust the bonds to their fair value)

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