Question

Mills Corporation acquired as a long-term investment $200 million of 7% 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 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, 2018, was $210 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 $250 million. Prepare the journal entries to record the sale.

Record the fair value adjustment

record any reclassification adjustment t

Record the sale of the investment by Mills.

Answer 1

Juli Answers Journal entries Dale particulars LF Debitoid creatin 2018 Investment in bonds ale DO 1$200 premium on boud investment alor $40 1 To cash $240 Being record investment in bonds] cash ale & 200 x 7% *6/12] Pe To premium on bonds TO Interest Revencie 4240x 5% *6112 3. Being record Interest devenue] 3 Fair value $ 210 million. 2. Deesi

Credit I pate 2001 yang $40 Jan-2 $11 particulars ff Debit Fair value adjustment Ale or s 40 - To unsealized holdina gain [$210-4240~$1]] + $177 Being secosi far value] Reclassification adjustment tle or $11 . To fair value adjustment [$ 40-15240-$0-$2103) Being Reclassification agljustment? cash ale Do $250 To premician on bonds (1401) To Gain To Investment in bonds Being the sale of Investment? $39 $200