Question

Exercise 12.2 Securities held-to-maturity: bond investment; effective interest, premium (LO12-1) Mills Corporation acquired as a long-term investment $240 million of x bonds, dated July 1. on July 2018. Company management has positive intent and ability to hold the bonds until maturity. The market interest rate (yield was 4% for bonds of similar risk and maturity Mills paid $280 million for the bonds. The company will recewe 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 milion 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 set the investment on January 2019 for $290 million. Prepare the journal entry to record the sale Complete this question by entering your answers in the tabs below. Reg 1 and 2 Reg 3 Reg 4 Prepare the journal entry to record Mills'investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effec (market) rate. (if no entry is required for a transactioryevent, select 'No journal entry required in the first account field. Enter you answers in millions rounded to 1 decinal place, 5.500.000 should be entered as .5) View transaction list Journal entry worksheet Record Mill's Investment in the bonds on July 1, 2016. Note Enter atbits before credits Event General Journal Debt Credit View general Journal Record entry Clear 19

Answer 1

1 & 2, prepare journal entries as follows:

Credit Date July 01 Account Titles and Explanation Investment in bonds Premium on bond investment Cash (To record the investment in bond) Debit $240 $40 $280 $7.20 Dec. 31 Cash [($240 x 6%) 6/12] Premium on bond investment (b/f) Interest revenue [($280 x 4%) x6/12] $1.60 $5.60

___________________________________________________________________________

3.

Compute amount will Mills report its investment in the December 31, 2018, balance sheet as follows:

Investment value	$280
Less: Amortization	($1.60)
	$278

___________________________________________________________________

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 journal entry as follows:

Credit Date Jan. 02 Debit $290 Account Titles and Explanation Cash Investment in bonds gain on sale of investment ($290 - $278.4) Premium on bond investment ($40-$1.6) $240 $11.60 $38.40