Answer:
A. 07.01.2021
Dr Investment in Bonds A/c 250
Dr Premium on Bond Investment A/c 40
Cr Cash 290
12.31.2021
Dr Cash 10
Cr Premium on Bonds 1.3
Cr Interest Revenue 8.7
B. $251.3
C. Jan-02
Dr Fair Value Adjustment 30
Cr Unrealised Gain or loss 30
Jan-02
Dr Cash 300
Cr Premium on Bonds A/c 38.7
Cr Gain On sale of Investment or Profit on sale of Investments 11.3
Cr Investment in Bonds A/c 250
Explanation:
a. Preparation of 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.
07.01.2021
Dr Investment in Bonds A/c 250
Dr Premium on Bond Investment A/c 40
(290-250)
Cr Cash 290
(Being To record investments in Bonds)
12.31.2021
Dr Cash 10
[(8%/2)* 250] semiannually
Cr Premium on Bonds 1.3
(10-8.7)
Cr Interest Revenue 8.7
[(6%/2)* 290] semiannually
(Being To record Interest)
b. Calculation for At what amount will Mills report its investment in the December 31, 2021, balance sheet
Book Value 290
Add:Premium on Bonds ( -40+1.3) -38.7
Amount to be reported 251.3
(290-38.7)
Therefore the Amount to be reported in Balance sheet will be Book Value of the amount of 251.3
c. Preparation of the journal entry to record the sale.
Jan-02
Dr Fair Value Adjustment 30
Cr Unrealised Gain or loss 30
(300-270)
Jan-02
Dr Cash 300
Cr Premium on Bonds A/c 38.7
(40-1.3)
Cr Gain On sale of Investment or Profit on sale of Investments 11.3
[300-(250+38.7)]
Cr Investment in Bonds A/c 250
(Being To record the sale)
