Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $80 million of 8% bonds, dated January 1, on January 1, 2021. Management intends to have the investment available for sale when circumstances warrant. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $66 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, 2021, was $70 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, 2021, balance sheet?

4-b. Prepare the entry necessary to achieve this reporting objective. 5. How would Fuzzy Monkey's 2021 statement of cash flows be affected by this investment? (If more than one approach is possible, indicate the one that is most likely.)

Answer 1

1) to 3)

Date	Particulars	Debit	Credit
Jan 1,2021	Investment in AFS Bonds	80,000,000
	Discount on Bond Investment		14,000,000
	Cash		66,000,000
Jun30,2021	Cash (80,000,000*4%)	3,200,000
	Discount on Bond Investment	100,000
	Interest Revenue(66,000,000*5%)		3,300,000
Dec31,2021	Cash	3,200,000
	Discount on Bond Investment	105,0000
	Interest Revenue(66,000,000+100,000)*5%		3,305,000

4a)

Fuzzy Monkey would report the investment at its fair value of $70,000,000

Balance sheet(partial) December 31,2021
Assets
Investments
Investment in AFS Bonds	$80,000,000
Add: Fair value adjustment	$56,205,000
Discount on Bond Investment (14,000,000-100,000-105,000)	$-13,795,000	70,000,000

4b)

Date	Particulars	Debit	Credit
Dec 31, 2021	Fair value adjustment	56,205,000
	Unrealized holding gain on Investment in AFS Bonds		56,205,000

5)

Statement of cash flow	Amount ($)	Inflow/outflow
Operating activities	6,400,000	Inflow
Investing activities	66,000,000	Outflow
Financing activities	None	NA

I HOPE IT USEFUL TO YOU IF YOU HAVE ANY DOUBT PLZ COMMENT GIVE ME UP-THUMB. THANKS....