Question

Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $80 million of 8% bonds, dated January 1, on January 1, 2021. 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 $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 any 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

Solution 1 to 3:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	1-Jan-21	Investment in Bond Dr	$80.00
		To Cash		$66.00
		To Discount on bond investment		$14.00
		(Being investment in bond recorded)
2	30-Jun-21	Cash Dr ($80 * 8% * 6/12)	$3.20
		Discount on bond investment Dr	$0.10
		To Interest revenue ($66*10%*6/12)		$3.30
		(Being revenue recognition for bond interest and discount amortized)
3	31-Dec-21	Cash Dr ($80 * 8% * 6/12)	$3.20
		Discount on bond investment Dr	$0.11
		To Interest revenue ($66.10*10%*6/12)		$3.31
		(Being revenue recognition for bond interest and discount amortized)

Solution 4a:

Fuzzy Monkey report its investment in the December 31, 2021 balance sheet at fair value = $70 million

solution 4b:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	31-Dec-21	Fair value adjustment Dr ($70 - $66 - $0.10 - $0.11)	$3.79
		To Unrealized holding gain or loss - NI		$3.79
		(Being adjusting entry to record investment at fair value)

Solution 5:

Statement of cash flows (Partial) For 2021
Particulars	Amount (In million)
Cash flow from operating activities:
Short term investment	$66.00
Less: Interest received	$6.40
Net cash flow from operating activities	$59.60	Outflow
Cash flow from investing activities:	$0.00