Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $110 million of 10% bonds, dated January 1, on January 1, 2021. Management intends to have the investment available for sale when circumstances warrant. For bonds of similar risk and maturity the market yield was 12%. The price paid for the bonds was $94 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2021, was $100 million.

Required:
1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate).
4-a. At what amount will Fuzzy Monkey report its investment in the December 31, 2021, balance sheet?
4-b. Prepare the entry necessary to achieve this reporting objective.
5. How would Fuzzy Monkey's 2021 statement of cash flows be affected by this investment? (If more than one approach is possible, indicate the one that is most likely.)

Answer 1

Date	General Journal	Debit	Credit
1-Jan	Investment in bonds	110
	Discount on bond investment			16
	Cash			94
Date	Cash Interest @ 5% * 110000000	Effective interest @ 6% * Balance	Discount amortiziation	Balance
1-Jan				94000000
30-Jun	5500000	5640000	140000	94140000
31-Dec	5500000	5648400	148400	94288400
30-Jun	Cash	5500000
	Discount on bond Investment	140000
	Interest revenue		5640000
31-Dec	Cash	5500000
	Discount on bond Investment	148400
	Interest revenue		5648400
Investment in bonds		110,000,000
Discount on bonds
1/1 Value	16000000
6/30 amortization	-140000
12/31 Amortization	-148400	-15711600
Unamortized cost		94288400
fair value adjustment	5711600
Net unrealized holding gains and losses		5711600
100000000-94288400
Impact of Statement of Cash Flow
Operating Activities	11000000	Inflow
Investing Activities	94000000	Outflow
Financing Activities	0	None