Question

Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $60 million of 6% bonds, dated January 1, on January 1, 2021. Management intends to include the investment in a short-term, active trading portfolio. For bonds of similar risk and maturity the market yield was 8%. The price paid for the bonds was $46 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 $50 million.Required: Prepare the relevant journal entries on the respective dates (record the interest at the effective rate).

Answer 1

To record the purchase of the bonds, debit the short-term investment - bonds and credit cash. To record the receipt of interest, debit cash and credit interest revenue. To record the adjustment for the change in fair value, debit unrealized holding gain - short-term investment and credit fair value adjustment - other comprehensive income.

To record the purchase of the bonds:

Date: January 1, 2021

• Debit: Short-term investment - Bonds $46 million
• Credit: Cash $46 million

To record the receipt of interest on June 30, 2021:

Date: June 30, 2021

• Debit: Cash $1.8 million (6% x $60 million)
• Credit: Interest revenue $1.8 million

To record the receipt of interest on December 31, 2021:

Date: December 31, 2021

• Debit: Cash $1.8 million (6% x $60 million)
• Credit: Interest revenue $1.8 million

To record the adjustment for the change in fair value:

Date: December 31, 2021

• Debit: Unrealized holding gain - Short-term investment $4 million (Fair value $50 million - Cost $46 million)
• Credit: Fair value adjustment - Other comprehensive income $4 million