Johnson & Johnson reported long-term debt of $ 8.3 billion and $ 7.1 billion as of the end of 2008 and 2007, respectively. The company reported that “the excess of the fair value over the carrying value of the debt was $1.4 billion in 2008 and $0.3 billion in 2007.” The effective interest rate was similar for the long-term debt in both years.

Required:

(a) What must have happened during 2008 to cause the difference between the market value and the book value of the debt to be so much larger at the end of 2008?

(b) If Johnson & Johnson exercised the option to account for the long-term debt at fair market value, what entry would have been recorded at the end of 2008?

(c) Record the entry Johnson & Johnson would have made if it did not exercise the fair market value, what entry would have been recorded at the end of 2008?

(d) Compare the entries you made in b and c above, and discuss.