In: Accounting
Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $250 million of 8% 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 10%. The price paid for the bonds was $228 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 $240 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?
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 | $250.00 | |
To Cash | $228.00 | |||
To Discount on bond investment | $22.00 | |||
(Being investment in bond recorded) | ||||
2 | 30-Jun-18 | Cash Dr ($250 * 8% * 6/12) | $10.00 | |
Discount on bond investment Dr | $1.40 | |||
To Interest revenue ($228*10%*6/12) | $11.40 | |||
(Being revenue recognition for bond interest and discount amortized) | ||||
3 | 31-Dec-18 | Cash Dr ($250 * 8% * 6/12) | $10.00 | |
Discount on bond investment Dr | $1.47 | |||
To Interest revenue ($229.40*10%*6/12) | $11.47 | |||
(Being revenue recognition for bond interest and discount amortized) |
Solution 4a:
Fuzzy Monkey report its investment in the December 31, 2018, balance sheet at fair value i.e. $240 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 ($240 - $228 - $1.40 - $1.47) | $9.13 | |
To Unrealized holding gain or loss - NI | $9.13 | |||
(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: | ||
Short term investment | $228.00 | |
Less: Interest received | $20.00 | |
Net cash flow from operating activities | $208.00 | Outflow |
Cash flow from investing activities: | $0.00 |