Question

Mills Corporation acquired as an investment $300 million of 7% bonds, dated July 1, on July 1, 2021. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 5% 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 $325 million.Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate.

Answer 1

Answer and Explanation:

As per the data given in the question,

Journal entries on July 1 and Dec. 31,2021

July-01 Investment in bonds A/C Dr. $300 million

Premium on bonds A/c Dr. $40 million

To Cash A/c $340 million

Dec-31 Cash A/c Dr. $10.5 million

($300 × 3.5%)

To Premium on bonds A/c $2.00 million

To Interest Revenue A/c $8.5 million

($340 × 2.5%)