1.Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2020
Investments in Bonds A/c…………………$200,000,000
Premium on Bond investment A/c………$40,000,000
To Cash A/c………………………………………………..$240,000,000
Explanation: Here, Mills Corporation acquired as a long-term investment $200 million on July 1, 2020. So, the fair value of Bonds is $200 million. But, Mills paid $240 million for the bonds, which means Mills paid $40 million in extra to the fair value of $200 million. This $40 million is the premium on bond investment.
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2. Prepare the journal entry to record interest on December 31, 2020. at the effective (market) rate.
Cash A/c (200,000,000*7%*6/12)………. $7,000,000
To Interest Revenue A/c (240,000,000*5%*6/12)………….6000,000
To Premium on Bonds A/c…………………………………$1000,000
Explanation: Here, Mills Corporation receiving interest semi-annually, therefore we have calculated Interest for 6 months. Interest revenues at the effective (market) rate at 5% is $6,000,000, which is less than the actual Interest received at 7%. Because Mills paid premium on bonds. So $1,000,000 is as an amortization or write off on Premium on Bonds.
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3. At what amount will Mills report its investment in the December 31, 2020, balance sheet?
The Book value of Investments in Bonds will be calculated as follows;
Investment in Bonds |
$200,000,000 |
Add: Unamortised Premium on Bonds |
|
Premium on Bond……………….………...$40,000,000 |
|
Amortised Premium on Bonds…………$(1,000,000) |
$39,000,000 |
Book Value of Held-to-Maturity Investments |
$239,000,000 |
Explanation: Here, the Investment is classified as “Held-to-Maturity”, since it is mentioned that the Mills has ability to hold the bonds until maturity. While calculating book value, we are adding unamortised portion of premium on bonds.
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4. Suppose Moody’s bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2021, for $250 million. Prepare the journal entry to record the sale.
Cash A/c…………………………..$ 250,000,000
To Premium on Bonds A/c………………..$ 39,000,000
To Gain on Sale A/c………………………. $11,000,000
To Investment in Bonds A/c……………….$ 200,000,000
Explanation: Gain on sale is calculated by deducting Book value of $239,000,000 from fair value $250,000,000. Here we are eliminating Investment in Bonds and Premium on Bonds since the investment is sold.
Check B Exercise 12-6 (Algo) Trading securities (L012-1, 12-3) Mills Corporation acquired as an investment $200...
Exercise 12-2 (Algo) Securities held-to-maturity; bond investment; effective interest, premium (L012-1) Mills Corporation acquired as a long-term investment $240 million of 7% bonds, dated July 1, on July 1, 2021. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (vield) was 5% for bonds of similar risk and maturity. Mills paid $280.0 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result...
PLEASE PUT SOLUTION IN THE SAME FORMAT AS THE IMAGE. THANK YOU! Exercise 12-6 (Algo) Trading securities (LO12-1, 12-3] Mills Corporation acquired as an Investment $240 million of 8% bonds, dated July 1, on July 1, 2021. Company management is holding the bonds in its trading portfolio. The market Interest rate yleld) was 6% for bonds of similar risk and maturity. Mills pald $280 million for the bonds. The company will receive Interest semiannually on June 30 and December 31....
Brief Exercise 12-5 (Algo) Available-for-sale securities [LO12-4) S&L Financial buys and sells securities which it classifies as available for sale On December 27, 2021, S&L purchased Coca-Cola bonds at par for $892,000 and sold the bonds on January 3, 2022 for $900,000. At December 31, the bonds had a fair value of 5885,000, and S&L has the intent and ability to hold the investment until fair value recovers. Prepare journal entries to record (a) any unrealized gains or losses occurring...
Exercise 12-10 (Algo) Available-for-sale securities [LO12-1, 12-4) Tanner-UNF Corporation acquired as a long-term investment $260 million of 7% bonds, dated July 1, on July 1, 2021 Company management has classified the bonds as an available for sale investment. The market interest rate yield) was 9% for bonds of similar risk and maturity. Tanner-UNF paid $220 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...
Brief Exercise 12-3 (Algo) Trading securities [LO12-3] S&L Financial buys and sells securities expecting to earn profits on short-term differences in price. On December 27, 2021, S&L. purchased Coca-Cola bonds at par for $881,000 and sold the bonds on January 3, 2022 for $887,500. At December 31, the bonds had a fair value of $876,000. Prepare journal entries to record (a) any unrealized gains or losses occurring in 2021 and (b) the sale of the bonds in 2022. (If no...
Tanner-UNF Corporation acquired as an investment $240 million of 6% bonds, dated July 1, on July 1, 2021. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $200 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, 2021, was $210...
PLEASE PUT SOLUTION IN THE SAME FORMAT AS THE IMAGE. THANK YOU! Exercise 12-12 (Algo) Available-for-sale securities (LO12-1, 12-4] Colah Company purchased $2,200,000 of Jackson, Inc., 7% bonds at par on July 1, 2021, with Interest pald semi-annually. Colah determined that it should account for the bonds as an available-for-sale Investment. At December 31, 2021, the Jackson bonds had a fair value of $2.520,000. Colah sold the Jackson bonds on July 1, 2022 for $1,980,000. Required: 1. Prepare Colah's Journal...
PLEASE PUT SOLUTION IN THE SAME FORMAT AS THE IMAGE. THANK YOU! Exercise 12-10 (Algo) Available-for-sale securities [LO12-1, 12-4] Tanner-UNF Corporation acquired as a long-term Investment $250 million of 8% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale Investment. The market Interest rate (yleld) was 10% for bonds of similar risk and maturity. Tanner-UNF paid $210 million for the bonds. The company will receive Interest semiannually on June 30 and December...
1) Record the entry for fair value adjustment of December 31, 2021. 2)Record the entry to adjust to fair value on the date of sale 3) Record the entry to reverse the previous fair value adjustment. 4) Record the entry for sale of investment in Coca Cola bonds. S&L Financial buys and sells securities which it classifies as available for sale. On December 27 2021. S&L purchased Coca-Cola bonds at par for $885,000 and sold the bonds on January 3,...
Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $200 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, 2021, was...