Question

Mills Corporation acquired as a long-term investment $260 million of 7% bonds, dated July 1, on July 1, 2018. Mills determined that it should account for the bonds as an available-for-sale investment. The market interest rate (yield) was 5% for bonds of similar risk and maturity. Mills paid $320 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, 2018, was $300 million.

Required:
1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.
3. At what amount will Mills report its investment in the December 31, 2018, balance sheet?
4. Suppose Moody’s bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2019, for $330 million. Prepare the journal entries to record the sale.

Answer 1

1 & 2.

Date	Account Titles and Explanation	Debit ($ in million)	Credit ($ in million)
July 1,2018	Investment in bonds	260
	Premium paid on bonds	60
	Cash		320
Dec 31,2018	Cash [260 * 7% *6/12]	9.1
	Premium on Bonds [9.1-8]		1.1
	Interest Revenue [260*5%*6/12]		8

3.

Reporting of Investment in the December 31, 2018, Balance sheet:

                                                                                    ($ in million)

Investment in Bonds		260
Add: Premium paid	60
Less: Premium amortized	(1.1)	58.9
Bond Value as on December 31,2018		318.9

4.

Date	Account Titles and Explanation	Debit ($ in million)	Credit ($ in million)
January 2,2019	Cash	330
	Investment in Bonds		260
	Premium on bonds		58.9
	Profit on sale of investments [330-260-58.9]		11.1