Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $ 160 million of 8% bonds, dated January , on January 1, 2018. Management intends to have the investment available for sale when circumstances warrant. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $142 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 $150 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, 2018, balance sheet? 4-b. Prepare the entry necessary to achieve this reporting objective. 5. How would Fuzzy Monkey's 2018 statement of cash flows be affected by this investment?

Answer 1

Amounts in Million Date Particulars DR CR 101-Jan Investment in bonds (face value) $160.00 $ 18.00 Discount on bond investment Cash (purchase price of bonds 142.00 $ 6.40 $ 0.70 2 30-un Cash 160*496 Discount on bonds investment Interest revenue 7.10-142*5% $ 6.40 $ 0.73 3 31-DeclCash 160*496 Discount on bond investment Interest revenue $ 7.141:596"(142+0.7) Particulars Investment in bonds Discount Amortized cost Investment will be reported in the balance sheet at its amortized cost 4 Amount $160.00 $ 16.57 $143.44 Operating cash flow Investing cash flow $ 12.80 Inflow 142.00 Outflow