Question

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?

Answer 1

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 recognition 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 recognition for bond interest and discount amortized)

Solution 4a:

Fuzzy Monkey report its investment in the December 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