Question

Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $60 million of 6% bonds, dated January 1, on January 1, 2021. Management intends to include the investment in a short-term, active trading portfolio. For bonds of similar risk and maturity the market yield was 8%. The price paid for the bonds was $46 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 $50 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 any 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.) Complete this question by entering your answers in the tabs below.

Answer 1

Answer
Journal entry
1 to 3
Date	Account Titles and Explanations	Debit	Credit
Jan 1 ,2018	Investment in bonds	$6,00,00,000
	Discount on investment in bonds		$1,40,00,000
	Cash		$4,60,00,000
	(To record purchase of bonds)
June 30, 2018	Cash	$   18,00,000
	[60,000,000*6%* 1/2]
	Discount on investment in bonds	$        40,000
	Interest Revenue		$   18,40,000
	[46,000,000*8%*1/2]
	(To record semi annual interest)
December 31,2018	Cash	$   18,00,000
	[60,000,000*6%* 1/2]
	Discount on investment in bonds	$        41,600
	Interest Revenue		$   18,41,600
	[(46,000,000+ 40,000)*8%*1/2]
	(To record semi annual interest)
4 a)	Fuzzy monkey will report the bonds at fair value i.e.$ 50,000,000.
4 b)
Date	Account Titles	Debit	Credit
Dec 31 ,2018	Fair Value Adjustment	$   39,88,400
	Unrealized holding Gain or Loss		$   39,88,400
	(To record fair value adjustment)
	Fair Value of the bonds	$5,00,00,000
	Carrying value of the bonds	$4,60,11,600
	[46,000,000+40,000+41,600]
	Unrealized holding gain	$   39,88,400
5)	Operating cash flows will be affected by $49,600,000. [46,000,000 - 18,00,000- 1800,000].
	The outflow in operating cash flows is $49,600,000.
	Since it is a short term investment.