Question

Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $90 million of 6% bonds, dated January 1, on January 1, 2018. Management intends to include the investment in a short-term, active trading portfolio. For bonds of similar risk and maturity the market yield was 8%. The price paid for the bonds was $73 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, 2018, was $80 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, 2018, balance sheet?
4-b. Prepare any entry necessary to achieve this reporting objective.
5. How would Fuzzy Monkey's 2018 statement of cash flows be affected by this investment?

Answer 1

Solution 1 to 3:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	1-Jan-18	Investment in Bond Dr	$90.00
		To Cash		$73.00
		To Discount on bond investment		$17.00
		(Being investment in bond recorded)
2	30-Jun-18	Cash Dr ($90 * 6% * 6/12)	$2.70
		Discount on bond investment Dr	$0.22
		To Interest revenue ($73*8%*6/12)		$2.92
		(Being revenue recoginition for bond interest and discount amortized)
3	31-Dec-18	Cash Dr ($90 * 6% * 6/12)	$2.70
		Discount on bond investment Dr	$0.23
		To Interest revenue ($73.22*8%*6/12)		$2.93
		(Being revenue recoginition for bond interest and discount amortized)

Solution 4a:

Fuzzy monkey report its investment at fair value in the December 31, 2018 balance sheet i.e. $80 million

Solution 4b:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	31-Dec-18	Fair value adjustment Dr ($80 - $73 - $0.22 - $0.23)	$6.55
		To Unrealized holding gain or loss - NI		$6.55
		(Being adjusting entry to record investment at fair value)

Solution 5:

Statement of cash flows (Partial) For 2018
Particulars	Amount (In million)
Cash flow from operating activities:
Interest received	$5.40
Cash flow from investing activities:
Cash paid for purchase of investment	-$73.00