Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $160 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 $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, 2021, 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, 2021, balance sheet? 4-b. Prepare the journal entry necessary to achieve this reporting objective. 5. How would Fuzzy Monkey's 2021 statement of cash flows be affected by this investment assuming Fuzzy anticipates holding these investments for a sufficiently long period? (lf more than one approach is possible, indicate the one that is most likely.)

1 to 3:

Record the investment bonds on Jan 1, 2021.

Record the interest revenue on June 30, 2021.

Record the interest revenue on Dec 21, 2021.

Req 4A:

At what amount will Fuzzy Monkey report its investment in the Dec 31, 2021 balance sheet?

Req 4B:

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

Req 5:

How would Fuzzy Monkey's 2021 statement of cash flows be affected by this investment assuming fuzzy anticipates holding these investments for a sufficiently long period?

Answer 1

Solution 1 to 3:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	01-Jan-21	Investment in Bond Dr	$160.00
		To Cash		$142.00
		To Discount on bond investment		$18.00
		(Being investment in bond recorded)
2	30-Jun-21	Cash Dr ($160 * 8% * 6/12)	$6.40
		Discount on bond investment Dr	$0.70
		To Interest revenue ($142*10%*6/12)		$7.10
		(Being revenue recoginition for bond interest and discount amortized)
3	31-Dec-21	Cash Dr ($160 * 8% * 6/12)	$6.40
		Discount on bond investment Dr	$0.73
		To Interest revenue [($142+0.70)*10%*6/12]		$7.14
		(Being revenue recoginition for bond interest and discount amortized)

Solution 4a:

Investment to reported = $150 millions

Solution 4b:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	31-Dec-21	Fair value adjustment Dr ($150 - $142 - $0.70 - $0.73)	$6.57
		To Unrealized holding gain or loss - NI		$6.57
		(Being adjusting entry to record investment at fair value)

Solution 5:

Statement of cash flows (Partial) For 2021
Particulars	Amount (In million)
Cash flow from operating activities:
Interest revenue ($6.40+ $6.40)	$12.80
Cash flow from investing activities:
Cash paid for purchase of investment	-$142.00