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On January 1, 2016, Rapid Airlines issued $200 million of its 8% bonds for $184 million. The bonds were priced to yield 10%. 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, 2016, the fair value of the bonds was $188 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.
Required:
1. Prepare the journal entry to record interest on June 30, 2016 (the first interest payment).
2. Prepare the journal entry to record interest on December 31, 2016 (the second interest payment).
3. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2016, balance sheet.

Sagot :

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Answer:

1. June 30, 2016

Dr Interest expense $9.2 million

Cr Discount on bonds payable $1.2million

Cr Cash $8 million

2. December 31, 2016

Dr Interest payment $9.26 million

Cr Discount on bonds payable $1.26million

Cr Cash $8 million

3. December 31, 2016

Dr Unrealized holding loss NI $1,000,000

Dr Unrealized holding loss OCI $5.46

Cr Fair value adjustment $6.46 million

Explanation:

1. Preparation of the journal entry to record interest on June 30, 2016

June 30, 2016

Dr Interest expense $9.2 million

( $184 million*10%2)

Cr Discount on bonds payable $1.2million

($9.2 million-$8 million)

Cr Cash $8 million

($200 million *8% /2)

(Being to record first interest payment)

2. Preparation of the journal entry to record interest on December 31, 2016

December 31, 2016

Dr Interest payment $9.26 million

( $184 million+$1.2million*10%2)

Cr Discount on bonds payable $1.26million

($9.26 million-$8 million)

Cr Cash $8 million

($200 million *8% /2)

(Being to record second interest payment)

3. Preparation of the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2016, balance sheet.

Dr Unrealized holding loss NI $1,000,000

Dr Unrealized holding loss OCI $5.46

($6.46 million-$1,000,000)

Cr Fair value adjustment $6.46 million

($188 million-$184 million+$1.2million+$1.26million)

(Being tl adjust the bonds to fair value)

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