Question
In: Accounting
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) | - | - |
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