In: Accounting
Fuzzy Monkey Technologies, Inc., purchased as a long-term
investment $80 million of 8% bonds, dated January 1, on January 1,
2021. Management has the positive intent and ability to hold the
bonds until maturity. 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. At what amount will Fuzzy Monkey report its
investment in the December 31, 2021 balance sheet?
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.)
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 recoginition 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 recoginition for bond interest and discount amortized) |
Solution 4:
Fuzzy Monkey report its investment in the December 31, 2021 balance sheet at amortized cost = $66 + $0.10 + $0.11 = $66.21 million
Solution 5:
Statement of cash flows (Partial) For 2021 |
||
Particulars | Amount (In million) | |
Cash flow from operating activities: | ||
Interest received | $6.40 | Inflow |
Cash flow from investing activities: | ||
Cash paid for purchase of investment | -$66.00 | Outflow |