Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $ 110 million of 10% bonds, dated January 1, 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 12%. The price paid for the bonds was $94 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 $100 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

investment in bonds 110 millions

discount on bonds 16 millions

cash 94 millions

to record purchase of bonds

cash 5.5 million

discount 0.14 millions

interest revenue 5.64 millions

to record cash proceeds on June 30th

cash 5.5 million

discount 0.1484 millions

interest revenue 5.6484 millions

to record cash proceeds on December 31th

Investment on Bonds

bonds 110,000,000

discount (15, 711, 600‬)

net 94,288,400‬

Cash flow:

Investing activities

purchase of bonds (94 millions)

proceeds from investmetn on bonds 11 millions

Step-by-step explanation:

June 30th

110 x 10% / 2 = 110 x 5% = 5.5 millions cash proceed

94 x 12%/2 = 5.64 interest revenue

0.14 amortization

December 31th

110 x 10% / 2 = 110 x 5% = 5.5 millions cash proceed

94.14 x 0.06 = 5,6484‬

0.1484 amortization

Balance sheet:

will post the carring value of the bonds

Cash flow:

Will report the cash used in the purchase

and then, the cash proceed from the interest payment of June 30th December 31th