Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $90 million of 6% 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 8%. The price paid for the bonds was $73 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 $80 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	1-Jan-18	Investment in Bond Dr	$90.00
		To Cash		$73.00
		To Discount on bond investment		$17.00
		(Being investment in bond recorded)
2	30-Jun-18	Cash Dr ($90 * 6% * 6/12)	$2.70
		Discount on bond investment Dr	$0.22
		To Interest revenue ($73*8%*6/12)		$2.92
		(Being revenue recoginition for bond interest and discount amortized)
3	31-Dec-18	Cash Dr ($90 * 6% * 6/12)	$2.70
		Discount on bond investment Dr	$0.23
		To Interest revenue ($73.22*8%*6/12)		$2.93
		(Being revenue recoginition for bond interest and discount amortized)

Solution 4:

As Fuzzy moneky intends to hold the bonds till maturity, therefore bond will be reported in Dec 31, 2018 balance sheet at amortized cost. Therefore

Amount will fuzzy report its investment in Dec 31, 2018 balance sheet = Cost of investment + discount amortized = $73 million + $0.22 million + $0.23 million = $73.45 million

Solution 5:

Statement of cash flows (Partial) For 2018
Particulars	Amount (In million)
Cash flow from operating activities:
Interest received	$5.40
Cash flow from investing activities:
Cash paid for purchase of investment	-$73.00