Answer:
the question is incomplete, so I looked for a similar one and found the following:
"Mills Corporation acquired as a long-term investment $240 million of 5% bonds, dated July 1, on July 1, 2018. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 3% for bonds of similar risk and maturity. Mills paid $280.0 million for the bonds. The company will receive interest semiannually on June 30 and December 31."
At what amount will Mills report its investment in the December 31, 2018, balance sheet?
July 1, 2018, bonds are purchased at a premium
Dr Investment in bonds 240,000,000
Dr Premium on investment in bonds 40,000,000
Cr Cash 280,000,000
December 31, 2018, first coupon payment
Dr Cash 12,000,000
Cr Interest revenue 8,400,000
Cr Premium on investment in bonds 3,600,000
The carrying value of the investment in bonds account = $280,000,000 - $3,600,000 = $276,4000,000 or $276.4 million
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.
January 2, 2019
Dr Cash 290,000,000
Cr Investment in bonds 240,000,000
Cr Premium on investment in bonds 36,400,000
Cr Gain on sale of investments 13,600,000
Explanation:
amortization of bond premium using the effective interest method on first coupon received = ($240,000,000 x 5%) - ($280,000,000 x 3%) = $12,000,000 - $8,400,000 = $3,600,000
Premium on investment in bonds = $40,000,000 - $3,600,000 = $36,400,000
