Question

Mills Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2018. Company management has positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 4% for bonds of similar risk and maturity. Mills paid $280 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, 2018, was $270 million.Required:1. & 2. 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.3. At what amount will Mills report its investment in the December 31, 2018, balance sheet?

Answer 1

Answer and Explanation:

The journal entries and the amount reported on the balance sheet is as follows:

1&2 The journal entries are as follows:

Investment in Bonds $240 million

Premium on Bond Investment $40 million  

               To Cash $280 million

(Being investments in Bonds is recorded)  

Cash (3% × $240 million) $7.2 million

         To Premium on Bonds A/c (Bal Figure) $1.6  million

         To Interest Revenue A/c (2% × $280 million) $5.6 million

(Being Interest is recorded)  

3. Now the amount reported on the balance sheet is

Investment in Bonds $240 million

Original Premium $40  million

Less: Amortization -$1.6 million

Amount to be reported in Balance sheet $278.4 million