Question

Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $220 million of 8% bonds, dated January 1, on January 1, 2018. Management intends to include the investment in a short-term, active trading portfolio. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $201 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, 2018, was $210 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, 2018.

- Record the interest revenue on June 30, 2018.

-  Record the interest revenue on December 31, 2018.
4-a. At what amount will Fuzzy Monkey report its investment in the December 31, 2018, 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.

Note: Enter debits before credits.

	Date General Journal Debit Credit December 31, 2018

5. How would Fuzzy Monkey's 2018 statement of cash flows be affected by this investment?

- Operating cash flow:

- Investing cash flow:

Answer 1

Solution 1 to 3:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	1-Jan-18	Investment in Bond Dr	$220.00
		To Cash		$201.00
		To Discount on bond investment		$19.00
		(Being investment in bond recorded)
2	30-Jun-18	Cash Dr ($220 * 8% * 6/12)	$8.80
		Discount on bond investment Dr	$1.25
		To Interest revenue ($201*10%*6/12)		$10.05
		(Being revenue recoginition for bond interest and discount amortized)
3	31-Dec-18	Cash Dr ($220 * 8% * 6/12)	$8.80
		Discount on bond investment Dr	$1.31
		To Interest revenue ($202.25*10%*6/12)		$10.11
		(Being revenue recoginition for bond interest and discount amortized)

Solution 4a:

Fuzzy Monkey report its investment in the December 31, 2018 balance sheet at fair value i .e. $210 million

Solution 4b:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	31-Dec-18	Fair value adjustment Dr ($210 - $201 - $1.25 - $1.31)	$6.44
		To Unrealized holding gain or loss - OCI		$6.44
		(Being adjusting entry to record investment at fair value)

Solution 5:

Statement of cash flows (Partial) For 2018
Particulars	Amount (In million)
Cash flow from operating activities:
Interest received	$17.60
Cash flow from investing activities:
Cash paid for purchase of investment	-$201.00