Question

Problem 12-2 (Algo)

Trading securities; bond investment; effective interest [LO12-1, 12-3] Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $250 million of 8% 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 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, 2021, 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, 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

1. to 3. Journal Entries - Fuzzy Monkey Technologies Inc. (in million)

1-Jan-21

Investment in Bond Dr $250

To Cash $228

To Discount on bond investment $22

(Being investment in bond recorded)

30-Jun-21

Cash ($250 * 8% * 6/12) Dr $10

Discount on bond investment Dr $1.4

To Interest revenue ($228 * 10% * 6/12) $11.4

(Being revenue recognition for bond interest and discount amortized)

31-Dec-21

Cash ($250 * 8% * 6/12) Dr $10

Discount on bond investment Dr $1.47

To Interest revenue ($229.4 * 10% * 6/12) $11.47

(Being revenue recognition for bond interest and discount amortized)

4-a. Fuzzy monkey report its investment on Dec 31, 2021 balance sheet at fair value i.e. $240 million.

4-b. Journal Entries - Fuzzy Monkey Technologies Inc. (in million)

Fair value adjustment Dr   $9.13

($240 - $228 - $1.4 - $1.47)

To Unrealized holding gain or loss - OCI $9.13

(Being adjusting entry to record investment at fair value)

5. Statement of Cash flows (partial) For 2021 (in million)

Cash flow from operating activities:

Interest received $20 Inflow

Cash from investing activities:

Cash paid for purchase of investment $228 Outflow