Question

Mills Corporation acquired as a long-term investment $200 million of 7% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 5% for bonds of similar risk and maturity. Mills paid $240 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was $210 million.

Required:
1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate.
3. At what amount will Mills report its investment in the December 31, 2021, balance sheet?
4. Suppose Moody's bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2022, for $250 million. Prepare the journal entries required on the date of sale.

How do you calculate requirement 4? it requires fair value adjustment, reclassification adjustment, and recording of the sale.

Answer 1

Ans:

Journal Entries		(Amount In Millions)
Date	Particulars	Debit($)	Credit($)
07.01.2021	Investment in Bonds A/c	200
	Premium on Bond Investment A/c	40
	Cash		240
	(To record investments in Bonds)
12.31.2021	Cash A/c ( 3.5 %* 200)	7
	Premium on Bonds A/c		1
	Interest Revenue A/c ( 2.5 %* 240)		6
	(To record Interest)
	Fair Market Value		210
	Book Value	240
	Add:Premium on Bonds ( -40+1)		201
	Increase in Value
	Amount to be reported in Balance sheet=	Book Value=	201
Jan-02	Fair Value Adjustment	40
	Unrealised Gain or loss		40
	(250-210)
Jan-02	Cash	250
	Premium on Bonds A/c		39
	Gain On sale of Investment or                      Profit on sale of Investments		11
	Investment in Bonds A/c		200
	(To record the sale)