Question

Mills Corporation acquired as a long-term investment $225 million of 8% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Mills paid $250 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, 2021, was $240 million.

Required:

1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate.

3. At what amount will Mills report its investment in the December 31, 2021, 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, 2022, for $266 million. Prepare the journal entries required on the date of sale.

PLEASE HELP WRITE OUT JOURNAL ENTRIES WITH WORK

Answer 1

Answer:

1&2

Journal Entries:

S.NO	Date	Accounts title	Debit $ (in million)	Credit $ (in million)
1.	July 1,2021	Investment in bonds	225
		Premimum on bond	25
		Cash		250
		(To record investment in bond)
2.	Dec 31, 2021	Cash(225*8%*6/12)	9
		Premimum on bond		1.5
		Interest revenue (250*6%*6/12)		7.5
		(To record the interest revenue)

3.

Mills Corporation Balance sheet 31-Dec-21

Heads	Amounts (Millions $)
Investment	225
Add: Premimum on bond (25-1.5)	23.5
Unrealized holding gain	248.5

4.

Journal Entries:

S.No.	Date	Accounts title	Debit ($ Million)	Credit ($ Million)
1.	Jan 2, 2022	Fair value of investment (266-240)	26
		Unrealized gain/loss		26
2.	Jan 2, 2022	Cash	266
		Gain on sale of investment		17.5
		Premimum on bond		23.5
		Investment in bonds		225

Working Notes:

Particular	Amount (Million $)
Sale value of investment	266
Less: Investment value on Dec 31, 2021	248.5
Gain on sale of investment	17.5

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