Mills Corporation acquired as a long-term investment $250 million of 6% bonds, dated July 1, on...

Mills Corporation acquired as a long-term investment $250 million of 6% 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 4% for bonds of similar risk and maturity. Mills paid $300 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 $275 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 $312 million. Prepare the journal entries required on the date of sale.

Solutions

Expert Solution

Answer :

1 & 2 Journal Entries - $ in Millions

Date	Account Title and Explanation	Debit ($)	Credit ($)
Jul 01	Investment in Bond	250	-
	Premium on investment in Bond	50	-
	To Cash	-	300
	(To Record purchase of bond)	-	-

Dec 31	Cash (3% of $250 million)	7.5	-
	Premium on investment bond	-	1.5
	Interest Revenue (2% of 300 million)	-	6
	(To Record the interest for 6 month) 3% is half of 6% and 2% is half of 4% as interest calculation for 6 month	-	-

(3). Extract of Balance sheet for investment in Bond

On asset side (amounts in millions)

Investment in 6% Long term bond book value = $300

Add : Premium on Bond ($1.5 - $50) = - $48.5

Amounts shown in the balance sheet = $251.50

(4) Journal Entry if its sale

Date	Accounts Title and Explanation	Debit ($)	Credit ($)
Jan.02.2022	Adjustment of fair value ($312 -275)	37	-
	Unrealised Gain or Loss	-	37
	(To Record unrealized gain or loss)	-	-

Jan.02.2022	Cash	312	-
	Premium on investment in bond ($50 - 1.5)	-	48.5
	Gain on sale of investment in bond	-	13.5
	Investment in bond	-	250
	(To Record sale of investment in bond)	-	-

ekkarill92 answered 1 year ago

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