On January 1, 2021, 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, 2021, 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:
a. Prepare the journal entry to record interest on June 30, 2018 (the first interest payment).
b. Prepare the journal entry to record interest on December 31, 2018 (the second interest payment).
c. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2018, balance sheet.

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abiolataiwo2015 abiolataiwo2015 · Answer 1 · 2020-10-02T18:01:49+02:00

Answer:

1. Debit Interest expense $8million

Credit Cash $8 million

2. Debit Interest expense $8 million

Credit Cash $8 million

3. Debit Bonds Payable $12million

Credit Adjustment in fair value $12 million

Explanation:

Preparation of Journal entries

1) Preparation of Journal entry for interest payment for the month of June 30, 2021

Debit Interest expense $8million

Credit Cash $8 million

[($200 million * 8%) *6/12]

We multiplied 6/12 because the payments were made half yearly.

2. Preparation of Journal entry for interest payment for the month of Dec 31, 2021

Debit Interest expense $8 million

Credit Cash $8 million

[($200 million * 8%) *6/12]

3) Preparation of Fair value adjustment for the month of Dec 31, 2021

Debit Bonds Payable $12million

Credit Adjustment in fair value $12 million

($200 million - $188 million)