Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $ 80 million of 6% bonds, dated January 1, on January 1, 2018. Management intends to have the investment available for sale when circumstances warrant. For bonds of similar risk and maturity the market yield was 8%. The price paid for the bonds was $64 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 $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, 2018, balance sheet?
4-b. Prepare the 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

(1.) Prepare journal entry to record purchase of bond as follows:

(2.) Prepare journal entry to record semi-annual interest revenue on 30 June 2018 as follows:

(3.) Prepare journal entry to record semi-annual interest revenue on 31 December 2018 as follows:

(4.)(a) Determine the amount of investment in available for sale security as follows:

Hence, there will be an upward revision in the value of bonds. Any increase/decrease in the fair value of available for sale securities is recorded in other comprehensive income.

(b) Pass journal entry to record increase in value of bonds as follows:

(5.) Prepare pro-forma cash flow statement to determine the effect of investment in bonds as follows: