Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $ 140 million of 10% 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 12%. The price paid for the bonds was $124 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 $130 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

Solution 1to 3:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	1-Jan-18	Investment in Bond Dr	$140.00
		To Cash		$124.00
		To Discount on bond investment		$16.00
		(Being investment in bond recorded)
2	30-Jun-18	Cash Dr ($140 * 10% * 6/12)	$7.00
		Discount on bond investment Dr	$0.44
		To Interest revenue ($124*12%*6/12)		$7.44
		(Being revenue recoginition for bond interest and discount amortized)
3	31-Dec-18	Cash Dr ($140 * 10% * 6/12)	$7.00
		Discount on bond investment Dr	$0.47
		To Interest revenue ($124.44*12%*6/12)		$7.47
		(Being revenue recoginition for bond interest and discount amortized)

Solution 4a:

As investment is classified under "Available for sale" category, therefore same should be reported at fair value on Dec 31, 2018 balance sheet. Therefore investment will be reported at $130 million.

Solution 4b:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	31-Dec-18	Fair value adjustment Dr ($130 - $124 - $0.44 - $0.47)	$5.09
		To Unrealized holding gain or loss - OCI		$5.09
		(Being adjusting entry to record investment at fair value)

Solution 5:

Statement of cash flows (Partial) For 2018
Particulars	Amount (In million)
Cash flow from operating activities:
Interest revenue	$14.00
Cash flow from investing activities:
Cash paid for purchase of investment	-$124.00