Question

Mills Corporation acquired as a long-term investment $240 million of 5% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 3% 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, 2021, was $270 million. Required: 1. & 2. Prepare the journal entry to record Mills' investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate. 3. At what amount will Mills report its investment in the December 31, 2021, 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, 2022, for $290 million. Prepare the journal entries required on the date of sale.

Answer 1

Solution : 11827 Jovenal Entries (Amount in $ Million) Date Date I Particulare Debit($) Credits July 1, 2021 Investinent on Bonds Aldri $240 I Premium on Bonds on Investment Ale all $ 40 To Cash Al Il to sucord the Pwychase of Bonds) $280 $1.8 Dec 31, 20211 Cash Ale (WN-) Dr. To Premium on Bonds Alclwm) To Interest Revenue Ale (WMS ( To suecord the interest Proceeds of Dec 31) $4-2 WNT) Cash Interest :- 51. annual Coupon Rate = 2:51. Semi-annual 2 Payment Pere year . Coupon Rate Cash Interest = $240x2.5. = $6 Million 100 WN-2 Interest Revenue :- Interest Revenue = Caovuying value x Marikitrate = $280X10S* = $4.2 Million 100

* 31. annual Mariket Rate = 1.59. Semi-annual Market Rate 2 Payment Per year Premium on Bonds / Amortization ? WN-3) Amortization = Cash Interest - Interest Revenue = ($6.0 - $4-2) Million = $1.9 Million 3 Value of Bond in the balance sheet The Net Value of Bond will be the Face Value of Bonds ples thie Caveying value of the Premium The Investment would be shown in the Balance sheet as follows: Investment in Bonds (face Value) = $240 Million Addo Premium on Bonds Investment = $38.8 Million ( $40 - $108) Value of Bond in the balance sheet -$278.8 Million a Jowinal Entry on Sell of Investment on Jan 2, 2022 (Amount in $ Millions) Date T Particulars Debit($) Creditlo) Jan 2, 2022 Cash Alc Dr. $290 To Cuain on sale of Investment $11-20 ($290 - $27808) To Premium on Bonds $38.80 To Investment in Bonds Ale $240 (To huecord the sale of Investment)