Question

Problem 12-3 (Algo) Securities available-for-sale; bond investment; effective interest [LO12-1, 12-4]

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $180 million of 6% 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 8%. The price paid for the bonds was $160 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 $170 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

1 to 3:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	01-Jan-21	Investment in Bond Dr	$180.00
		To Cash		$160.00
		To Discount on bond investment		$20.00
		(Being investment in bond recorded)
2	30-Jun-21	Cash Dr ($180 *6% * 6/12)	$5.40
		Discount on bond investment Dr	$1.00
		To Interest revenue ($160*8%*6/12)		$6.40
		(Being revenue recoginition for bond interest and discount amortized)
3	31-Dec-21	Cash Dr ($180 *6% * 6/12)	$5.40
		Discount on bond investment Dr	$1.04
		To Interest revenue ($161*8%*6/12)		$6.44
		(Being revenue recoginition for bond interest and discount amortized)

4a:

investment balanace reported = $170 millions

4b:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	31-Dec-21	Fair value adjustment Dr ($170 - $160 - $1 - $1.04)	$7.96
		To Unrealized holding gain or loss - OCI		$7.96

5:

Statement of cash flows (Partial) For 2021
Particulars	Amount (In million)
Cash flow from operating activities:
Interest received	$10.80	Inflow
Cash flow from investing activities:
Cash paid for purchase of investment	-$160.00	Outflow