Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $180 million of 6% bonds, dated January 1, on January 1, 2021. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 8%. The price paid for the bonds was $160 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 $170 million.

Required:
1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate).
4. At what amount will Fuzzy Monkey report its investment in the December 31, 2021 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.)

Prepare the relevant journal entries on the respective dates (record the interest at the effective rate). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places, (i.e., 5,500,000 should be entered as 5.50).)

No	Date	General Journal	Debit	Credit
1	January 01, 2021	Investment in bonds
		Cash
		Discount on bond investment
2	June 30, 2021	Cash
		Discount on bond investment
		Investment in bonds

At what amount will Fuzzy Monkey report its investment in the December 31, 2021 balance sheet? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places, (i.e., 5,500,000 should be entered as 5.50).

	Investment million

Answer 1

No	Date	General Journal	Debit	Credit
1	Jan. 1, 2021	Investment in Bonds	180.00
		Discount on bond investment		20.00
		Cash		160.00
		(To record investment in bonds)
2	Jun. 30, 2021	Cash ($180 x 6% x 1/2)	5.40
		Discount on bond investment	1.00
		Interest revenue		6.40
		(To record interest on bond investment)
3	Dec. 31, 2021	Cash ($180 x 6% x 1/2)	5.40
		Discount on bond investment	1.04
		Interest revenue		6.44
		(To record interest on bond investment)

Working:

Date	Cash interest (3%)	Effective interest (4%)	Discount Amortization	Carrying value
Jan. 1, 2021				160.00
Jun. 30, 2021	5.40	6.40	1.00	161.00
Dec. 31, 2021	5.40	6.44	1.04	162.04

4. Fuzzy Monkey will report its investment in the December 31, 2021 balance sheet at its amortized cost of $162.04 million as the investment is classified as a long-term investment.

5. a. Operating CF: The interest received on the investment will be shown under the operating activities section of the cash flow statement.

b. Investing CF: The cash used to purchase the bond investment will be shown under the investing activities section of the cash flow statement.