Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $150 million of 6% bonds, dated January 1, on January 1, 2021. Management intends to have the investment available for sale when circumstances warrant. When the company purchased the bonds, management elected to account for them under the fair value option. For bonds of similar risk and maturity the market yield was 8%. The price paid for the bonds was $133 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 $140 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.)

Req 1 to 3 Req 4A Req 4B Req 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.) (Do not round intermediate calculations. Enter all amounts as positive values. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).) Operating cash flow Investing cash flow million million < Req 4B Reg 5 >

Answer 1

Ans.

1. Record Fuzzy Monkey’s investment on bonds on January 1, 2021.

Date	Accounts Title & Explaination	Debit	Credit
1-Jan	Investment in bonds	$          160,000,000.00
	Discount on bond investment	$            27,000,0000.00
	Cash		$            133,000,000.00

2. Record the interest revenue on June 30, 2021.

Date	Cash Interest @ 3% * 160,000,000	Effective Interest @4% * Balance	Discount Amortization	Balance
01-Jan-21				$ 133,000,000.00
30-Jun-21	$                    4,800,000.00	$ 5,320,000.00	$    520,000.00	$ 133,520,000.00
31-Dec-21	$                    4,800,000.00	$ 5,340,800.00	$    540,800.00	$ 134,060,800.00

Date	Accounts Title & Explaination	Debit	Credit
30-Jun	Cash	$ 4,800,000.00
	Discount on bond investment	$      520,000.00
	Interest Revenue		$ 5,320,000.00

3. Record the interest revenue on December 31, 2021

Date	Accounts Title & Explaination	Debit	Credit
31-Dec	Cash	$ 4,800,000.00
	Discount on bond investment	$      540,800.00
	Interest Revenue		$ 5,340,800.00

4(a) At what amount will Fuzzy Monkey report its investment in the December 31, 2021 balance sheet.

Fuzzy Monkey will report the investment at its fair value of $140 millionbeecause the investment will be classified as a trading security and the unrealized holding gain of $5,939,200 would be recognized in Fuzzy Monkey’s 2021 income statement.

Calculation of Fair Value Adjustment

Investment in Bond		$ 160,000,000.00
Discount on Bond
1/1 value	$      27,000,000.00
6/30 amortization	$          (520,000.00)
12/31 amortization	$          (540,800.00)	$    25,939,200.00
Balance on 12/31		$ 134,060,800.00
Fair Value on 12/31		$ 140,000,000.00
Fair Value Adjustment		$       5,939,200.00

Balance Sheet (Partial)
31-Dec - 2021
Investment in AFS securities	$    160,000,000.00
Add: fair value adjustment	$        5,939,200.00
Less: discount on bond investments	$    (25,939,200.00)	$ 140,000,000.00

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.

Date	Accounts Title & Explaination	Debit	Credit
31-Dec	Fair Value Adjustment	$        5,939,200.00
	Net unrealized holding gains and losses		$       5,939,200.00

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.)

Operating activities cash flows: Cash inflow from interest of $4.8+ $ 4.8 = $9.6million

Note: If Fuzzy Monkey prepares an indirect method statement of cash flows, it would have interest revenue of$5,320,0000 + $ 5,340,800 = $10,660,800 included in net income, so would have to include an adjustment of $ 9,600,000 - $  $10,660,800 = ($ 1,060,800) to get from net income to cash flow from operating activities.

Investing activities cash flows: Cash outflow from purchasing investments of $ 133,000,000.

Operating Cash Flow	9.60	million	Inflow
Investing Cash Flow	133.00	million	Outflow
Financing Cash Flow	-	million	None