(Note: this is a variation of E14-13 modified to consider the fair value option for reporting liabilities.) Ferderal Semiconductors issued a 11% bonds, date January 1, with a face amount of $800 million on January 1, 2013. The bonds sold for $739,814,813 and mature on December 31, 2032 (20 years). For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Federal determines interest at the effective rate. Ferderal elected the option to report these bonds at their fair value. On December 31, 2013, the fair value of the bonds $730 million as determined by their market value in the over-the-counter market.
1. Prepare the journal entries on August 1, 2013, to record (a) the issuance of the bonds by Limbaugh and (b) the investment by Interstate.
2. Prepare the journal entries for both Limbaugh and Interstate Containers exercised the warrants it held.