Question

uzzy Monkey Technologies, Inc., purchased as a long-term investment $90 million of 6% bonds, dated January 1, on January 1, 2021. 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 $73 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 $80 million.

Required:
1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate).

-Record Fuzzy Monkey’s investment on bonds on January 1, 2021.

-Record the interest revenue on June 30, 2021.

-Record the interest revenue on December 31, 2021.
4-a. At what amount will Fuzzy Monkey report its investment in the December 31, 2021, balance sheet?
4-b. Prepare the entry necessary to achieve this reporting objective.

-Record any necessary entry to report the investment at the correct value on the 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.)

	Operating cash flow million Investing cash flow million

Answer 1

1 to 3
			$'M
		Long Term Investment	90
		Interest rate	6%
		Market Yield	8%
		Price Paid for Bonds	73
		Fair Value of Bonds	80
	Journal Entries
	Date	Account Title	Debit	Credit
	01/01/2021	Investment in Bonds	90
		Discoun on Bonds		17	(90-73)
		Cash		73
	30/06/2021	Cash	2.7		(90 X 6% X 6/12)
		Discoun on Bonds	0.22		(2.92-2.7)
		Interest Revenue		2.92	(73 X 8% X 6/12)
	31/12/2021	Cash	2.7		(90 X 6% X 6/12)
		Discount on Bonds	0.23		(2.93-2.7)
		Interest Revenue		2.93	(73+0.22) X 8% X6/12
4a	Amount reported in balance sheet as investment	80
4b	Date	Account Title	Debit	Credit
		Fair Value Adjustment	6.55
		Net unrealized gains and losses		6.55	80-(90-(17-0.22-0.23))
		(Record of adjustment to fair market value)
5
		Effect on Cash flow statement
		Cash flow from Operating Activities
		Interest revenue on June	2.92
		Interest revenue on December	2.93
		Cash flow from Investing Activities
		Purchase of investment in company	73