Question

Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $90 million of 6% bonds, dated January 1, on January 1, 2021. 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, 2021, 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, 2021 balance sheet? 4-b. Prepare any 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

SOLUTION:

REQUIREMENT 1 TO 3

JOURNAL ENTRIES

(IN MILLIONS)

DATE	PARTICULARS	DEBIT($)	CREDIT($)
JAN 1,2021	INVESTMENT IN BONDS A/C	90
	TO DISCOUNT ON BONDS INVESTMENT A/C		17
	TO CASH A/C		73
	(BEING INVESTMENT IN BONDS RECORDED)
JUN 30,2021	CASH A/C(90*3%)	2.7
	DISCOUNT ON BONDS INVESTMENT A/C	0.22
	TO INTEREST REVENUE A/C(73*4%)		2.92
	(BEING INTEREST REVENUE RECORDED)
DEC 31,2021	CASH A/C((90*3%)	2.7
	DISCOUNT ON BONDS INVESTMENT A/C	0.2232
	TO INTEREST REVENUE A/C(73+0.08)*4%		2.9232
	(BEING INTEREST REVENUE RECORDED)

REQUIREMENT 4A)

FUZZY MONKEY REPORT ITS INVESTMENT IN THE DECEMBER 31,2021 IS $80 AT FAIR VALUE,BECAUSE BONDS ARE BEING TREATED AS TRADING SECURITIES

REQUIREMENT 4B)

DATE	PARTICULARS	DEBIT($)	CREDIT($)
DEC 31,2021	FAIR VALUE ADJUSTMENT A/C(80)-(73+.08+0.2232)	6.6968
	TO UNREALISED HOLDING GAIN AND LOSS A/C		6.6968
	(BEING ADJUSTMENT RECORDED)

REQUIREMENT 5:

OPERATING CASH FLOW(73-2.7-2.7) $67.6 OUTFLOW

INVESTING CASH FLOW -    NO FLOW

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