Question

Zooey Inc. issued 8% bonds with a face of $760,000,000 for $696,000,000 cash on January 1, 2021, when the market effective rate was 10%. Zooey pays interest semiannually on June 30 and December 31, records interest at the effective rate, and elected the option to report these bonds at their fair value at year-end, 12/31. There was no change in rates during the first 6 months of 2021. On December 31, 2021, the fair value of the bonds was $712,000,000, and $1,000,000 of the increase in fair value was due to a change in the general (risk-free) rate of interest.

Required:
1. Record the first interest payment on June 30, 2021.
2. Record the second interest payment on on December 31, 2021.
3. Record the fair value adjustment on December 31, 2021.

Answer 1

1.June 30, 2021

Dr Interest expense $34,800,000

Cr Discount on bonds payable $4,400,000

Cr Cash $30,400,000

2. Dec.31,2021

Dr Interest expense $35,020,000

Cr Discount on bonds payable $4,620,000

Cr Cash $30,400,000

3. Dec.31,2021

Dr Unrealized holding loss- NI $1,000,000

Dr Unrealized holding loss- OCI $24,020,000

Cr Fair value adjustment $25,020,000

Step-by-step explanation:

1. Preparation of the journal entry to Record the first interest payment on June 30, 2021.

June 30, 2021

Dr Interest expense $34,800,000

($696,000,000 * 10%/2)

Cr Discount on bonds payable $4,400,000

($34,800,000-$30,400,000)

Cr Cash $30,400,000

($760,000,000 * 8%2)

(To record the first interest payment)

2. Preparation of the journal entry to Record the second interest payment on on December 31, 2021.

Dec.31,2021

Dr Interest expense $35,020,000

[($696,000,000+$4,400,000)* 10%/2]

Cr Discount on bonds payable $4,620,000

($35,020,000-$30,400,000)

Cr Cash $30,400,000

($760,000,000 * 8%2)

(To record the second interest payment)

3. Preparation of the journal entry to Record the fair value adjustment on December 31, 2021.

Dec.31,2021

Dr Unrealized holding loss- NI $1,000,000

Dr Unrealized holding loss- OCI $24,020,000

($25,020,000-$1,000,000)

Cr Fair value adjustment $25,020,000

($712,000,000-$696,000,000+$4,400,000+$4,620,000)

(To adjust the bonds to their fair value)