Question

egg Study TEXTBOOK SOLUTIONS EXPERT 0&A Sea Chapter 12, Problem 2E 0 Bookmarks)Show all steps:ON e ns corporation acquired as a long ter investment S240 million of 6% bonds, dated July 1, on July 1, 2018. Company management has the positive intent and ability to hold the bonds until maturity The market interest rate (yield) was 4% for bonds of similar risk and maturity Mills paid S280 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, 2018, was $270 million. Required: 1. Prepare the journal entry to record Mills' investment in the bonds on July 1, 2018 2. Prepare the journal entries by Mills to record interest on December 31, 2018, at the effective (market) rate. 3. At what amount will Mills report its investment in the December 31, 2018, balance sheet? Why? 4. Suppose Moody's bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2019, for $290 million. Prepare the journal entry to record the sale.

Answer 1

Solution 1&2:

Journal Entries - Mills Corporation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	1-Jul-18	Investment in Bond Dr	$240.00
		Premium on bond investment Dr	$40.00
		To Cash		$280.00
		(Being investment in bond recorded)
2	31-Dec-18	Cash Dr ($240 * 6% * 6/12)	$7.20
		To Premium on bond investment		$1.60
		To Interest revenue ($280*4%*6/12)		$5.60
		(Being revenue recoginition for bond interest and premium amortized)

Solution 3:

Mills report its investment on december 31, 2018 balance sheet at amortized cost i.e. = Face value of bond + Unamortized Premium

= $240 + $38.40 = $278.40

Solution 4:

Journal Entries - Mills Corporation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	2-Jan-19	Cash Dr	$290.00
		To Investment in Bond		$240.00
		To Premium on bond investment		$38.40
		To Gain on sale of investment		$11.60
		(Being bond sold and gain recoganized)