Question

On January 1, 2021, BBX issued $400,000 of its 8% bonds for $368,000. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. BBX records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2021, the fair value of the bonds was $370,000 as determined by their market value on the NYSE. $1,000 of the change in fair value was due to a change in the general (risk-free) rate of interest.

Required:
1. Prepare the journal entry to record interest on June 30, 2021 (the first interest payment).
2. Prepare the journal entry to record interest on December 31, 2021 (the second interest payment).
3. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2021, balance sheet.

Answer 1

the journal entry for recording the issuance of the bonds

January 1, 2021, bond issued at a discount

Dr Cash 368,000

Dr Discount on bonds payable 32,000

Cr Bonds payable 400,000

the journal entry to record first coupon payment

June 30, 2021, first coupon payment

Dr Interest expense 18,400

Cr Cash 16,000

Cr Discount on bonds payable 2,400

amortization of discount = (368,000 x 5%) - 16,000 = 2,400

the journal entry to record second coupon payment

December 31, 2021, second coupon payment

Dr Interest expense 18,520

Cr Cash 16,000

Cr Discount on bonds payable 2,520

amortization of discount = (370,400 x 5%) - 16,000 = 2,520

bonds' carrying value before adjustment = $372,920

bonds' fair value = $370,000

gain on fair value adjustment = $372,920 - $370,000 = $2,920

the journal entry to record the fair value adjustment of bonds

December 31, 2021, adjusting entry for bonds' fair market value

Dr Fair value adjustment 2,920

Cr Unrealized gain on bonds' fair value 2,920