Question

Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $250 million of 8% bonds, dated January 1, on January 1, 2018. 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, 2018, 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, 2018, balance sheet?
4-b. Prepare any 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

1 to 3.
(Amount in $millions)

Date	Account Name	Debit	Credit
Jan 1, 2018	Invesment in bonds	250
	Discount on bond investment		22
	Cash		228
	(To record investment in bonds)
Jun 30, 2018	Cash ($250 x 4%)	10
	Discount on bond investment	1.4
	Interest revenue ($228 x 5%)		11.4
	(To record interest revenue)
Dec 31, 2018	Cash ($250 x 4%)	10
	Discount on bond investment	1.47
	Interest revenue [($228+1.4) x 5%]		11.47
	(To record interest revenue)

4-a.

Fuzzy Monkey will report this investment at fair value of $240 million, since it is short term investment.

4-b.

Investment in bonds		$250,000,000
Discount on bonds
1/1 value	$22,000,000
6/30 amortization	(140,000)
12/31 amortization	(147,000)	(21,713,000)
Balance on 12/31		$228,287,000
Fair value on 12/31		$240,000,000
Fair value adjustment		$11,713,000

Journal entry

Account Name	Debit	Credit
Fair value adjustment	11,713,000
Unrealized holding gain - OCI		11,713,000
(To record fair value adjustment of bond investment)

5.

Under cash flow statement, Cash from Investing Activities will get affected by the amount of cash flows from this project.

Cash flow from investing activities:
Investment in bonds	-228
Cash Interest on bonds	+20
Net cash used for investing activities	-208

Fuzzy Monkey's 2018 cash flows will get reduced by $208 million by this investment.