Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $170 million of 10% bonds, dated January 1, on January 1, 2018. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 12%. The price paid for the bonds was $151 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 $160 million.

Required:
1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate).
4. At what amount will Fuzzy Monkey report its investment in the December 31, 2018, balance sheet?
5. How would Fuzzy Monkey's 2018 statement of cash flows be affected by this investment?

Answer 1

Journal Entries - Fuzzy Monkey Technologies Inc.

S/N Date Particulars Debit'Mill Credit'Mil

1 1-Jan-18 Investment in Bond $170.00

To Cash $151.00

To Discount on bond investment $19.00

(Being investment in bond recorded)

2 30-Jun-18 Cash ($170*10% *6/12) $8.50

Discount on bond investment $0.56

To Interest revenue ($151*12%*6/12) $9.06

(Being revenue recognition for bond interest

and discount amortized)

3 31-Dec-18 Cash ($170*10%*6/12) $8.50

Discount on bond investment $0.59

To Interest revenue ($151.56*12%*6/12) $9.09

(Being revenue recognition for bond interest

and discount amortized)

4. The investment is to be recorded at amortized cost on balance sheet:

= $151 + $0.56 + $0.59

= $152.15 million

5. Statement of cash flows (Partial) for 2018

Particulars Amount'mil Description

Cash flow from operating activities:

Interest received $17.00 Inflow

Cash flow from investing activities:

Cash paid for purchase of investment $151.00 Outflow