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In the infamous jumpscare scene, in the Fellowship of the Ring Bilbo says:

"I'm sorry, that I brought this upon you, my boy... I'm sorry that you must carry this burden. I'm sorry for everything."

He also gives Frodo his sword and mithril armor. Both of which imply that he knows of Frodo's quest.

But in Return of the King, Bilbo says:

"Frodo ... Any chance of seeing that old ring of mine ... the one I gave you?"

Which implies the exact opposite, that he never knew.

Does Bilbo know of Frodo's quest, that he had the One Ring? (which means his question in Return of the King is only meant to imply that he has dementia) Or was this intentionally left ambiguous?

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    I don't think the second quote implies anything, I think it is a joke. I think they are just downplaying their adventures, because they are all done now and it's time to relax and enjoy good company. – Jan Hudec Jan 4 at 21:18
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I've always attributed that to dementia; remember that Bilbo was very old for a hobbit (about 128 years); only the Old Took had been older.

Bilbo attended the Council of Elrond where the history of the ring was explained by Gandalf and Elrond and the plan was made to destroy it in Mount Doom.

'That is the warning bell for the Council of Elrond,' cried Gandalf. 'Come along now! Both you and Bilbo are wanted.'

(source: The Fellowship of the Ring)

As @KevinTroy notes, Bilbo even volunteered before Frodo:

'Very well, very well, Master Elrond!' said Bilbo suddenly. 'Say no more! It is plain enough what you are pointing at. Bilbo the silly hobbit started this affair, and Bilbo had better finish it, or himself.

(source)

Tolkien Gateway states Bilbo's ageing is caused by the Ring's destruction:

Because of the Ring's destruction, that prolonged his life, Bilbo started ageing again; as Arwen told to Frodo later, Bilbo started looking ancient according to his kind.

It doesn't seem too far-fetched to me to infer that the apparent dementia is a likely result. It's based on the following quote:

‘Do you wonder at that, Ring-bearer?’ said Arwen. ‘For you know the power of that thing which is now destroyed; and all that was done by that power is now passing away. But your kinsman possessed this thing longer than you. He is ancient in years now, according to his kind; and he awaits you, for he will not again make any long journey save one.’

(source: The Return of the King)

As @chepner notes, Bilbo seems to recall some of his memories afterwards:

‘What a pity!’ said Bilbo. ‘I should have liked to see it again. But no, how silly of me! That’s what you went for, wasn’t it: to get rid of it? But it is all so confusing, for such a lot of other things seem to have got mixed up with it: Aragorn’s affairs, and the White Council, and Gondor, and the Horsemen, and Southrons, and oliphaunts – did you really see one, Sam? – and caves and towers and golden trees, and goodness knows what besides.

(source)

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    I guess so, yes. I recall it from memory, I attended that meeting too :P – Glorfindel Jan 2 at 13:28
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    In the book, Bilbo not only attends the Council, but volunteers to take the Ring to Mordor and destroy it. He is fully aware that it is the One. In the "Many Partings" chapter, he makes other forgetful remarks and frequently falls asleep. It is strongly implied that his advanced age has caught up with him, now that the Ring's preservative effects are wearing off. – Kevin Troy Jan 2 at 22:39
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    The book expands on the scene; Bilbo explicitly chides himself for being forgetful. "Bilbo: 'Which reminds me: what's become of my ring, Frodo, that you took away?' Frodo: 'I have lost it, Bilbo dear. I got rid of it, you know.' Bilbo: 'What a pity! I should have liked to see it again. But no, how silly of me! That's what you went for, wasn't it: to get rid of it? ...' (Return of the King, Chapter 6 "Many Partings") – chepner Jan 3 at 15:52
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    To expand on @KevinTroy's comment, in the book, Bilbo wouldn't have learned of the ring until the council of Elrond as Gandalf was keeping the whole thing very close to the chest and didn't confirm his suspicions about the ring until performing the test in Frodo's fire many years after Bilbo left the Shire. Bilbo was feeling the effects of the ring (feeling "like butter scraped over too much bread", an unnatural paranoia where he tried locking the thing up but "couldn’t rest without it in my pocket", etc.) so he had cause to consider it a burden even without knowing its true nature. – jmbpiano Jan 3 at 19:16
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    @axsvl77 But Smeagol died when the ring was destroyed. The scene with Bilbo happens after the ring is destroyed, and so old age is catching up with him. – trlkly Jan 5 at 6:26

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