In: Accounting
Fuzzy Monkey Technologies, Inc., purchased as a short-term
investment $160 million of 8% bonds, dated January 1, on January 1,
2018. 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 $142
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, 2018, was $150 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, 2018, balance sheet?
4-b. Prepare any entry necessary to achieve this
reporting objective.
5. How would Fuzzy Monkey's 2018 statement of cash
flows be affected by this investment?
Solution 1 to 3:
Journal Entries - Fuzzy Monkey Technologies Inc. | ||||
Event | Date | Particulars | Debit (In Million) | Credit (In Million) |
1 | 1-Jan-18 | Investment in Bond Dr | $160.00 | |
To Cash | $142.00 | |||
To Discount on bond investment | $18.00 | |||
(Being investment in bond recorded) | ||||
2 | 30-Jun-18 | Cash Dr ($160 * 8% * 6/12) | $6.40 | |
Discount on bond investment Dr | $0.70 | |||
To Interest revenue ($142*10%*6/12) | $7.10 | |||
(Being revenue recoginition for bond interest and discount amortized) | ||||
3 | 31-Dec-18 | Cash Dr ($160 * 8% * 6/12) | $6.40 | |
Discount on bond investment Dr | $0.74 | |||
To Interest revenue ($142.70*10%*6/12) | $7.14 | |||
(Being revenue recoginition for bond interest and discount amortized) |
Solution 4a:
Fuzzy monkey report its investment at Dec 31, 2018 balance sheet at fair value i.e. $150 million
Solution 4b:
Journal Entries - Fuzzy Monkey Technologies Inc. | ||||
Event | Date | Particulars | Debit (In Million) | Credit (In Million) |
1 | 31-Dec-18 | Fair value adjustment Dr ($150 - $142 - $0.70 - $0.74) | $6.56 | |
To Unrealized holding gain or loss - NI | $6.56 | |||
(Being adjusting entry to record investment at fair value) |
Solution 5:
Statement of cash flows (Partial) For 2018 |
||
Particulars | Amount (In million) | |
Cash flow from operating activities: | ||
Short term investment | $142.00 | |
Less: Interest received | $12.80 | |
Net cash flow from operating activities | $129.20 | Outflow |
Cash flow from investing activities: | $0.00 |