Question

Exercise 12-6 (Algo) Trading securities [LO12-1, 12-3]

Mills Corporation acquired as an investment $300 million of 6% bonds, dated July 1, on July 1, 2021. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 4% for bonds of similar risk and maturity. Mills paid $350 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 $325 million.

Required:
1. & 2. 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.
3. Prepare the journal entry by Mills to record any fair value adjustment necessary for the year ended December 31, 2021.
4. 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 $360 million. Prepare the journal entries required on the date of sale.

Answer 1

Solution1 and 2:

Journal Entries - Mills Corporation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	01-Jul-21	Investment in Bond Dr	$300.00
		Premium on bond investment Dr	$40.00
		To Cash		$350.00
		(Being investment in bond recorded)
2	31-Dec-21	Cash Dr ($300 * 6% * 6/12)	$9.00
		To Interest revenue ($350*4%*6/12)		$7.00
		To Premium on bond investment		$2.00
		(Being revenue recoginition for bond interest and discount amortized)

Solution 3:

Journal Entries - Mills Corporation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	31-Dec-21	Unrealized holding gain or loss - OCI Dr	$23.00
		To Fair value adjustment ($350 -$2.00 - $325)		$23.00
		(Being adjusting entry to record investment at fair value)

Solution 4:

Journal Entries - Mills Corportation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	02-Jan-22	Fair value adjustment Dr (360-325)	$35.00
		To Unrealized holding gain or loss - OCI		$35.00
		(To record the adjustment)
2	02-Jan-22	Cash Dr	$360.00
		To Investment in Bond		$300.00
		To Fair value adjustment ($35- $23)		$12.00
		To Premium on bond investment (50-2)		$48.00
		(To record sale of bonds)