Question

Problem 12-2 Trading securities; bond investment; effective interest [LO12-1, 12-3] Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $150 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 $133 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 $140 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

			Fuzzy Monkey Technologies Inc.
			(All Amt in Million)
			Journal Entry for 2018
	Date	Particular	Amount Debit	Amount Cr
1)	01-Jan	Investment in bonds	$                                     150.00
		To Discount on Bonds Investment		$                               17.00
		To Cash		$                             133.00
		(Being amount of Bonds purchased)
		Bonds Amortization Schedule
	Date	Cash Interest @3%=($150*3%)	Effective Interest@4%	Discount Amortization	Balance
	01-Jan-18				$               133.00
	30-Jun-18	$                                                            4.50	$                                          5.32	$                                 0.82	$               133.82
	30-Dec-18	$                                                            4.50	$                                          5.35	$                                 0.85	$               134.67
		Effective Interest
	30th June	($133*4%)
	31st Dec	($133.82*4%)
	Semiannually Interest=6%/2,and Effective Interest=8%/2
2)	Date	Particular	Amount Debit	Amount Cr
	30-Jun	Cash	$                                          4.50
		Discount on Bonds Investment	$                                          0.82
		To Interest Revenue		$                                 5.32
		(Being amount of Interest)
	31-Dec	Cash	$                                          4.50
		Discount on Bonds Investment	$                                          0.85
3)		To Interest Revenue		$                                 5.35
		(Being amount of Interest)
		Fuzzy Mnkey Technologies Inc.
4)		Balance Sheet(Partial Balance Sheet)
		December 31st,2018
		Investment in Bonds		$                             150.00
		Discount on Bonds Value($150-$133)	$                                       17.00
		Less: Discount on Bonds(30th June)	$                                        -0.82
		Less: Discount on Bonds(31st Dec)	$                                        -0.85	$                               15.33
		Balance on 31st Dec		$                             134.67
		Fair Value on December 31st		$                             140.00
		Fair Value Adjustment		$                                 5.33
	31st Dec	Fair Value Adjustment	$                                          5.33
		To Unrealized Holding Gain		$                                 5.33
		(Being amount of Unrealized holding gain)
5)		Operating Cash InFlow=($4.5+$4.5)	$                                          9.00
		Investing Cash outflow	$                                     133.00