Question

Mills Corporation acquired as a long-term investment $290 million of 8% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Mills paid $340 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was $330 million.

Required:
a. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.
b. At what amount will Mills report its investment in the December 31, 2018, balance sheet?
c. Suppose Moody’s bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2019, for $290 million. Prepare the journal entry to record the sale.

Answer 1

Journal Entries are given below

Step-by-step explanation:

Mills Corporation-journal Entries

Date Particulars Debit (In Miln) Credit (in Mln)

01-Jul-21 Bond Investment $290.00

Investment premium $50.00

Cash $340.00

Investment recorded

31-Dec-21 Cash ($290 * 8% * 6/12) $11.60

Premium bond investment $1.40

Interest revenue ($340*6%*6/12) $10.20

Revenue recognized for bond interest and amortization of discount.

31-Dec-21 Unrealized holding gain or loss $8.60

Fair value adjustment ($340 - $330 - $1.40) $8.60

investment recorded at fair value.

02-Jan-19 Fair value adjustment Dr $8.60

Reclassification adjustment - $8.60

Fair value adjustment at the time of sale

02-Jan-19 Cash $290.00

Loss on sale of investment $48.60

bond investment premium $48.60

Investment in Bond $290.00

Sale of investment.