Question

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 of changing market conditions, the fair value of the bonds at December 31, 2021, was $260.0 million Required: 1. & 2. Prepare the journal entry to record Mills'investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate. 3. At what amount will Mills report its investment in the December 31, 2021, balance sheet? 4. Suppose Moody's bond rating agency upgraded the risk rating of the bonds, and Mils decided to sell the investment on January 2. 2022 for $290 million. Prepare the journal entry to record the sale. Complete this question by entering your answers in the tabs below. Reg 1 and 2 Reg 3 Reg4 Prepare the journal entry to record Mills Investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate. (If no entry is required for a transaction/event, select "No journal entry required in the first account field. Enter your answers in millions rounded to 1 decimal place. (.e., 5,500,000 should be entered as 5.5)) View transaction list

Answer 1

Answer
Journal entry
1&2
Date	Account Titles and Explanations	Debit (Million)	Credit (Million)
01-07-2021	Investment in Bonds A/c	$               240
	Premium on Bond Investment A/c	$                 40
	To, Cash		$                 280
	(To record investments in Bonds)
01-07-2021	Cash A/c ( 3.5%* 240)	$              8.40
	To, Premium on Bonds A/c (Bal Figure)		$                1.40
	To, Interest Revenue A/c ( 3 %* 280)		$                7.00
	(To record Interest)
3	Amount to be reported in Balance sheet
	Investment in Bonds		$                 240
	Original Premium	$                 40
	Less: Amortisation	$              1.40	$              38.60
	Amount to be reported in Balance sheet		$            278.60
4	Account Titles and Explanations	Debit (Million)	Credit (Million)
02-01-2022	Cash	$               290
	To, Premium on Bonds A/c		$              38.60
	To, Gain On sale of Investment or Profit on sale of     Investments		$                11.4
	To, Investment in Bonds A/c		$                 240
	(To record the sale)