Question

Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $240 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 $219 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 $230 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

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Part 1 to 3
Date	Account	Debit	Credit
Jan 1 2018	Investment in Bond	$       240
	Discount on Bond Investment		$         21
	Cash		$       219
	(Being bond purchased)
Jun 30 2018	Cash (240*6%*6/12)	$      7.20
	Discount on Bond Investment	$      1.56
	Interest Revenue (219*8%*6/12)		$      8.76
	(being interest revenue recorded)
Dec 31 2018	Cash (240*6%*6/12)	$      7.20
	Discount on Bond Investment	$      1.56
	Interest Revenue (219*8%*6/12)		$      8.76
	(being interest revenue recorded)
Part 4a	Will be reported at fair value $230 million
	Investment in Bond		$       240
	Less: Discount on Bond Investment		$        -18
	21-1.56-1.56
	Amortized Cost		$       222
	Less: Fair Value		$       240
	To be recorded		$         18
Date	Account	Debit	Credit
Dec 31 2018	Fair Value adjustment	$         18
	Unrealized Holding gain		$         18
	(being revalued at fair value)
Part 5
	Interest of $17.52 (8.76+8.76) will be recorded as operating activities.
	If Fuzzy Monkey anticipates holding these investments for a sufficiently long period,
	which seems likely given that it didn’t classify them as trading securities to begin with,
	it would report this $219 cash outflow as an investing activities cash flow. On the other hand,
	if Fuzzy Monkey anticipated holding the securities for a short period of time,
	it might treat the cash outflow as an operating activities cash flow,
	similar to how it would treat cash flows associated with a trading security