Question

Mills Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2018. Mills determined that it should account for the bonds as an available-for-sale investment. The market interest rate (yield) was 4% for bonds of similar risk and maturity. Mills paid $280 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, 2018, was $270 million.

Required:
1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.
3. At what amount will Mills report its investment in the December 31, 2018, 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, 2019, for $290 million. Prepare the journal entries to record the sale.

Answer 1

. Thank you

1 & 2 Debit ($) 240,000,000 40,000,000 S.No. Accounts title and Explanation Credit ($) Investment in Bonds Premium on Bond Investment Cash 280,000,000 2. |Cash ($240,000,000"396) 7,200,000 Premium on bonds 1,600,000 Interest Revenue ($280,000,000*2%) 5,600,000 3 Amount () 240,000,000 Amount () Investment in Bonds Premium on Bonds: Original Premium 12/31/18 Amortization Book Value 4 40,000,000 (1,600,000) 38,400,000 278,400,000 Cash 290,000,000 Gain on sale Premium on bonds Investment in bonds 1,160,000 38,400,000 240,000,000

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