Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $200 million of 10% 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 12%. The price paid for the bonds was $178 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 $190 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

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Solution: Answer can be rounded per question requirement e.g. 2 decimal or less or more. Treated as Available for sale Securities: Jounal entries Credit Date Jan.01 Debit) $ 200.00 1) 2021 (plug) $ 22.00 $ 178.00 2) Jun.30 2021 Account title and explaination Investment in Bonds Discount on Bonds Investment Cash (To record the investment in bonds) Cash (200*5%) Discount on Bonds Investment Interest Revenue (178*6%) (To record the interest revenue) Cash (200*5%) Discount on Bonds Investment Interest Revenue (178+0.68)*6% (To record the interest revenue) $ 10.00 $ 0.68 (plug) $ 10.68 OR: 3) Dec.31 2021 $ 10.00 $ 0.72 (plug) $ 10.72 4)a $ 190.00 at fair value, because bonds are being treated as Available for sale security. 4)b Date Credit Debit $ 10.60 Dec.31 2021 Account title and explaination Fair value adjustment (190) - (178+0.68+0.72) Unrealized holding Gain and loss - OCI (To record the adjustment) $ 10.60 5) Inflow (10+10) a) b) Operating Cash Flow Investing Cash Flow $ 20.00 $ 178.00 outflow