Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $250 million of 8% 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 10%. The price paid for the bonds was $228 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 $240 million. Required: 1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate). 4-a. At what amount will Fuzzy Monkey report its investment in the December 31, 2021, balance sheet? 4-b. Prepare the entry necessary to achieve this reporting objective. 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 1

Please find below table useful to compute desired results: -

в А i Long-term investment 2 Interest Rate 3 Market Yield 4 Price Paid for Bonds 5 Fair value of bonds DE 250 =8/100 =10/100 228 240 6 Credit Journal Entries 8 Date Account Titles and Explanation Debit 9 01-01-2021. Investment in Bonds I=D1 10 1.. Discount on Bonds 11 Cash 12 13 30-06-2021. Cash =D1*D2*6/12 14 2. Discount on bonds =D15-C13 15 Interest Revenue =C9-D11 =D4 1 Effect on Cash flow statement Particulars Amount Cash flows from operating activities Interest revenue on June =D15 Interest revenue on December =D19 Cash flows from Investing activities Purchase of investment in company (=-D4 =D4*D3*6/12 16 17 31-12-2021. Cash =D1*D2*6/12 Discount on Bonds =D19-C17 Interest Revenue 4-a Amount reported in balance sheet as investment =(D4+C14)*D3*6/12 =D5 31-12-2021. Fair Value Adjustment =D5-C9-D10-C14-C18)) Net Unrealised gains and losses =C23 (to record adjustment of trading securities to fair market value)

End results would be as follows: -

А 1 Long-term investment 2 Interest Rate 3 Market Yield 4 Price Paid for Bonds 5 Fair value of bonds DE 250.00 8.00% 10.00% 228.00 240.00 6. 7 5.. Credit Journal Entries Account Titles and Explanation Investment in Bonds Discount on Bonds Cash Debit 250.00 22.00 228.00 8 Date 9 01-01-2021. 10 1.. 11 12 13 30-06-2021. 14 2.. 15 Effect on Cash flow statement Particulars Amount Cash flows from operating activities Interest revenue on June 11.40 Interest revenue on December 11.47 Cash flows from Investing activities Purchase of investment in company (228.00) Cash Discount on bonds Interest Revenue 10.00 1.40 11.40 17 31-12-2021. Cash 18 3.. Discount on Bonds 19 Interest Revenue 10.00 1.47 11.47 4-a 21 Amount reported in balance sheet as investment 240.00 4-b 23 31-12-2021. Fair Value Adjustment 9.13 24 Net Unrealised gains and losses 9.13 (to record adjustment of trading securities to fair market value) 25