Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $220 million of 8% bonds, dated January 1, on January 1, 2018. 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 $201 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 $210 million.

Required:
a. Prepare the journal entry to record Fuzzy Monkey’s investment on January 1, 2018.
b. Prepare the journal entry by Fuzzy Monkey to record interest on June 30, 2018.
c. Prepare the journal entries by Fuzzy Monkey to record interest on December 31, 2018.

Answer 1

January 1, 2018

Dr Investment in bonds 220,000,000

Cr Cash 201,000,000

Cr Discount on investment in bonds 19,000,000

June 30, 2021

Dr Cash 8,800,000

Dr Discount on investment in bonds 1,250,000

Cr Interest revenue 10,050,000

December 31, 2018

Dr Cash 8,800,000

Dr Discount on investment in bonds 1,312,500

Cr Interest revenue 10,112,500

discount amortization = ($201,000,000 x 5%) - $8,800,000 = $1,250,000

discount amortization = ($202,250,000 x 5%) - $8,800,000 = $1,312,500