Question

Question 1: S&L Financial buys and sells securities which it classifies as available-for-sale. On December 27, 2021, S&L purchased Coca-Cola bonds at par for $883,000 and sold the bonds on January 3, 2022, for $890,000. At December 31, the bonds had a fair value of $877,000, and S&L has the intent and ability to hold the investment until fair value recovers.

Prepare journal entries to record (a) any unrealized gains or losses occurring in 2021 and (b) the sale of the bonds in 2022, including recognition of any unrealized gains in 2022 prior to sale and reclassification of amounts out of OCI.

Record the entry for fair value adjustment of December 31, 2021.

Record the entry to adjust to fair value on the date of sale.

Record the entry to reverse the previous fair value adjustment.

Record the entry for sale of Investment in Coca Cola bonds.

Question 2: Mills Corporation acquired as a long-term investment $240 million of 8% bonds, dated July 1, on July 1, 2021. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Mills paid $280.0 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 $265.0 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 $292 million. Prepare the journal entry to record the sale.

Answer 1

Dear Student,

As per the HOMEWORKLIB POLICY, only the first question should be answered. Kindly take note of it. each new question should be posted separately.

No.	Date	General journal	Debit	Credit
1	December 31, 2021	Unrealized holding loss – OCI (883000-877000)	6000
		Fair value adjustment		6000
2	January 03, 2022	Fair value adjustment (877000-890000)	13000
		Unrealized holding gain—OCI		13000
3	January 03, 2022	Reclassification adjustment—OCI	7000
		Fair value adjustment (13000-6000)		7000
4	January 03, 2022	Cash	890000
		Investment in Coca-Cola bonds		883000
		Gain on sale of investments		7000