Question

P 12–4 Fair value option; bond investment; effective interest L012–1, QL012–2, Q L012–3, QL012-4, L012–8 [This problem is a variation of G P 12-3, modified to cause the investment to be accounted for under the fair value option.] Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $80 million of 8% bonds, dated January 1, on January 1, 2021. 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 10%. The price paid for the bonds was $66 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 $70 million. Required: 1. Prepare the journal entry to record Fuzzy Monkey's investment on January 1, 2021. 2. Prepare the journal entry by Fuzzy Monkey to record interest on June 30, 2021 (at the effective rate). 3. Prepare the journal entries by Fuzzy Monkey to record interest on December 31, 2021 (at the effective rate). 4. At what amount will Fuzzy Monkey report its investment in the December 31, 2021, balance sheet? Why? 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.) 6. How would your answers to requirements 1-5 differ if management had the intent and ability to hold the investments until maturity?

Answer 1

(1) Requirements:- Date Accounts and Explanation | 01 January 2021 Investment in bonds (Face Value) Discount on bond investment Bank (Paid price) $ in Million Debit Credit 80.00 14.00 66.00 (2) Credit Date 30 June 2021 Accounts and Explanation Bank ($80 X 4%) Discount on bond investment Interest Revenue ($66 X 5%) Debit 3.20 0.10 3.30 (3) Credit Date Accounts and Explanation 31 December 2021 Bank ($80 X 4%) Discount on bond investment Interest Revenue ($66 + 0.10) X 5%)* Debit 3.20 0.11 3.31 * On June 30, $0.10 Million has amortizsed from Discount on bond investment. That means Amortized cost will increase by $0.10 Million (4) Fuzzy Monkey reports its investment in bonds as on 31st December 2021 in the balance sheet is at Amortized Cost Particulars $ in Million Investment in bonds 80.00 Less: Discount on bond investment ($14 - 0.1 -0.11) (13.80) Amortized Cost $ 66.21

Fuzzy Monkey Statement of Cash Flow On 31st December 2021 Direct Method CASH FLOW FROM OPERATING ACTIVITIES Cash Inflow from Interest on Invenvestment ($3.2 + $3.2) 6.40 CASH FLOW FROM INVESTING ACTIVITIES Purchase of investment in bond (66.00) Indirect Method CASH FLOW FROM OPERATING ACTIVITIES Interest on Invenvestment ($3.30 + $3.31) Less: Amortization of Discount on bond investment CASH PROVIDED (USED) IN OPERATING ACTIVITIES 6.61 (0.21) 6.40 CASH FLOW FROM INVESTING ACTIVITIES Purchase of investment in bond (66.00)