Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $200 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 $178 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 $190 million.
Required:
1. to 3. Prepare the relevant journal entries on
the respective dates (record the interest at the effective
rate).
Record Fuzzy Monkey’s investment on bonds on January 1, 2021.
Record the interest revenue on June 30, 2021.
Record the interest revenue on December 31, 2021.
4-a. At what amount will Fuzzy Monkey report
its investment in the December 31, 2021 balance sheet?
4-b. Prepare any entry necessary to achieve this
reporting objective.
Record any necessary entry to report the investment at the correct value on the balance sheet.
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
Solution 1-3:
Journal Entries - Fuzzy Monkey Technologies Inc. | ||||
Event | Date | Particulars | Debit (In Million) | Credit (In Million) |
1 | 1-Jan-21 | Investment in Bond Dr | $200.00 | |
To Cash | $178.00 | |||
To Discount on bond investment | $22.00 | |||
(Being investment in bond recorded) | ||||
2 | 30-Jun-21 | Cash Dr ($200 *10% * 6/12) | $10.00 | |
Discount on bond investment Dr | $0.68 | |||
To Interest revenue ($178*12%*6/12) | $10.68 | |||
(Being revenue recoginition for bond interest and discount amortized) | ||||
3 | 31-Dec-21 | Cash Dr ($200 *10% * 6/12) | $10.00 | |
Discount on bond investment Dr | $0.72 | |||
To Interest revenue ($178.68*12%*6/12) | $10.72 | |||
(Being revenue recognition for bond interest and discount amortized) |
Solution 4a:
Fuzzy monkey report its investment on Dec 31, 2021 balance sheet at fair value i.e. $190 million
Solution 4b:
Journal Entries - Fuzzy Monkey Technologies Inc. | ||||
Event | Date | Particulars | Debit (In Million) | Credit (In Million) |
1 | 31-Dec-21 | Fair value adjustment Dr ($190 - $178 - $0.68 - $0.72) | $10.60 | |
To Unrealized holding gain or loss - OCI | $10.60 | |||
(Being adjusting entry to record investment at fair value) |
Solution 5:
Statement of cash flows
(Partial) For 2021 |
|
Particulars | Amount (In million) |
Cash flow from operating activities: | |
Interest received | $20.00 |
Cash flow from investing activities: | |
Cash paid for purchase of investment | -$178.00 |
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