Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $110 million of 10% bonds, dated January 1, on January 1, 2018. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 12%. The price paid for the bonds was $94 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 $100 million. Required: 1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate). 4. At what amount will Fuzzy Monkey report its investment in the December 31, 2018, balance sheet? 5. How would Fuzzy Monkey's 2018 statement of cash flows be affected by this investment?

Answer 1

Solution 1 to 3:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	01-Jan-18	Investment in Bond Dr	$110.00
		To Cash		$94.00
		To Discount on bond investment		$16.00
		(Being investment in bond recorded)
2	30-Jun-18	Cash Dr ($110 * 10% * 6/12)	$5.50
		Discount on bond investment Dr	$0.14
		To Interest revenue ($94*12%*6/12)		$5.64
		(Being revenue recoginition for bond interest and discount amortized)
3	31-Dec-18	Cash Dr ($110 * 10% * 6/12)	$5.50
		Discount on bond investment Dr	$0.15
		To Interest revenue [($94 +$0.14)*12%*6/12]		$5.65
		(Being revenue recoginition for bond interest and discount amortized)

Solution 4:

Investment to be reported  in the December 31, 2018, balance sheet = $94 + $0.14 + $0.15 = $94.29

Solution 5:

Statement of cash flows (Partial) For 2018
Particulars	Amount (In million)
Cash flow from operating activities:
Interest revenue ($5.50+ $5.50)	$11.00
Cash flow from investing activities:
Cash paid for purchase of investment	-$94.00