Question

Mills Corporation acquired as a long-term investment $250 million of 8% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Mills paid $290 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 $270 million.
Required:
a. 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.
b. At what amount will Mills report its investment in the December 31, 2021, balance sheet?
c. Suppose Moody's bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2 2022 for $300 million. Prepare the journal entry to record the sale.

Answer 1

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)