Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $ 180 million of 6% bonds, dated January 1, on January 1, 2018. Management intends to have the investment available for sale when circumstances warrant. For bonds of similar risk and maturity the market yield was 8%. The price paid for the bonds was $160 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 $170 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 the 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

1 to 3 :

In the books of Fuzzy Monkey Technologies:

Date	General Journal	Debit	Credit
		$	$
January 1, 2018	Investment in AFS Bonds	180,000,000
	Discount on Bond Investment		20,000,000
	Cash		160,000,000
June 30, 2018	Cash ( $ 180,000,000 x 3 % )	5,400,000
	Discount on Bond Investment	1,000,000
	Interest Revenue ( $ 1,600,000 x 4 %)		6,400,000
December 31, 2018	Cash	5,400,000
	Discount on Bond Investment	1,040,000
	Interest Revenue ( $ 160,000,000 + $ 1,000,000 ) x 4 %		6,440,000

4-a. Fuzzy Monkey would report the Investment at its fair value of $ 170,000,000.

Fuzzy Monkey Technologies Inc. Balance Sheet ( Partial ) December 31, 2018
Assets
Investments
Investment in AFS Bonds	$ 180,000,000
Add: Fair Value Adjustment	7,960,000
Discount on Bond Investment	(17,960,000)	170,000,000

4-b.

	Account Titles	Debit	Credit
		$	$
December 31, 2018	Fair Value Adjustment	7,960,000
	Unrealized Holding Gain on Investment in AFS Bonds		7,960,000

5.

Statement of Cash Flows	Amount	Inflow / Outflow
Operating Activities	$ 10,800,000	Inflow
Investing Activities	160,000,000	Outflow
Financing Activities	None	NA