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Mills Corporation acquired as a long-term investment $200 million of 7% bonds, dated July 1, on...

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.

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Answer #1

Hi

Let me know in case any issue and query:

Naming convention is not available can be slightly different:

Ignore the explanation line in blue while putting answer in the question format if not require: Treated as AFS Securities: Solution: ournal entries Date Account title and explaination Debit Credit $ 200.0 $ 40.0 1) Jul.01 Investment in Bonds 2018 Premium on bonds Investment (240-200) $ 240.0 Cash To record the investment in bonds) |Cash (200*3.5%) Premium on Bonds Investment (plug) Interest Revenue (240*2.5%) To record the interest revenue) 2) |Dec.31 2018 6.0 3) 210 million, at fair value

$ 40.0 29.0 (240-1)-(210) $ 11.0 4) a) Date Account title and explaination Jan.02 Fair value adjustment 2019 Unrealized Holding Gain oci [(240-1)-(210)]+ (11) Debit Credit $ 40.0 $ 40.0 To record the fair value adjustment) b)Date Account title and explaination Debit Credit $ 11.0 Jan.02 Reclassification Adjustement OC 2019 $ 11.0 Fair value adjustment To Record the entry for reclassification adjustment) c) Date Account title and explaination Jan.02 Cash 2019 Debit Credit $ 250.0 Premium on Bonds Investment Gain NI Investment in Bonds To record the sale of investment) $ 39.0 $ 11.0 $ 200.0 (40-1)

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