Question

Problem 12-4 Fair value option; bond investment; effective interest [LO12-1, 12-2, 12-3, 12-4, 12-8]

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $180 million of 6% bonds, dated January 1, on January 1, 2018. Management intends to have the investment available for sale when circumstances warrant. When the company purchased the bonds, management elected to account for them under the fair value option. For bonds of similar risk and maturity the market yield was 8%. The price paid for the bonds was $160 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 $170 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 journal entry necessary to achieve this reporting objective.
5. How would Fuzzy Monkey’s 2018 statement of cash flows be affected by this investment assuming Fuzzy anticipates holding these investments for a sufficiently long period?

At what amount will Fuzzy Monkey report its investment in the December 31, 2018, balance sheet? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places, (i.e., 5,500,000 should be entered as 5.50).

INVESTMENT -------------- MILLION

Prepare the journal entry necessary to achieve this reporting objective. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places, (i.e., 5,500,000 should be entered as 5.50).)

Record any necessary entry to report the investment at the correct value on the balance sheet.

DECEMBER 31, 2018 DEBIT CREDIT

How would Fuzzy Monkey’s 2018 statement of cash flows be affected by this investment assuming Fuzzy anticipates holding these investments for a sufficiently long period? (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

OPERATING CASH FLOW $ ----- MILLION IFLOW

INVESTING CASH FLOW $----- MILLION OUTFLOW

Answer 1