Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $220 million of 8% bonds, dated January 1, on January 1, 2021. Management intends to have the investment available for sale when circumstances warrant. 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, 2021, was $210 million.
Required:
1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate).
4-a. At what amount will Fuzzy Monkey report its investment in the December 31, 2021, balance sheet?
4-b. Prepare the entry necessary to achieve this reporting objective.
5. How would Fuzzy Monkey's 2021 statement of cash flows be affected by this investment? (If more than one approach is possible, indicate the one that is most likely.)

Answer 1

Answer and Explanation:

1 to 3.

Journal Entries - Fuzzy Monkey Technologies Inc.

Debit (In Million) Credit (In Million)

1. 1-Jan-21

Dr Investment in Bond Dr $220.00

Cr To Cash $201.00

CrTo Discount on bond investment $19.00

2.

30-Jun-21

Dr Cash ($220 *8% * 6/12) $8.80

Dr Discount on bond investment Dr $1.25

Cr To Interest revenue ($201*10%*6/12) $10.05

3.

31-Dec-21

Dr Cash ($220 *8% * 6/12) $8.80

Dr Discount on bond investment Dr $1.31

Cr To Interest revenue ($202.25*10%*6/12) $10.11

4a.

Fuzzy monkey report its investment on Dec 31, 2021 balance sheet at fair value which is $210 million

4b.

Journal Entries - Fuzzy Monkey Technologies Inc.

Debit (In Million) Credit (In Million)

1. 31-Dec-21

Dr Fair value adjustment ($210 - $201 - $1.25 - $1.31) $6.44

Cr To Unrealized holding gain or loss - OCI $6.44

5.

Statement of cash flows (Partial)

For 2021

Particulars Amount (In million)

Cash flow from operating activities:

Interest received $17.60 Inflow

Cash flow from investing activities:

Cash paid for purchase of investment $201.00

Outflow