Question

Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $90 million of 6% 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 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, 2016, was $80 million.

Required:

1.Prepare the relevant journal entries on the respective dates (record the interest at the effective rate). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places, (i.e., 5,500,000 should be entered as 5.50).) a. Record Fuzzy Monkey’s investment on bonds on January 1, 2018.

b. Record the interest revenue on June 30, 2018.

c. Record the interest revenue on December 31, 2018.

2. At what amount will Fuzzy Monkey report its investment in the December 31, 2018, balance sheet?

3. How would Fuzzy Monkey's 2018 statement of cash flows be affected by this investment?

a. Operating cash flow

b. Investing cash flow

Answer 1

2.

Since, the market value of the bond on Dec 31,2018 is $80 million, the investment in bond will be shown as $80 million. Since, the book value is $73 million, the following adjusting entry needs to be passed

Investment in Bond..Dr $7 million

To Unrealised gain on Investment $7 million

3 a. Operating Cash flow- No effect in operating cash flow as the investments are related to investing activities

b. Investing cash flow

Cash outflow on purchase of bond        -73 million

Cash inflow on interest receipt                 2.7 million

Net impact-(Outflow)                                 -70.3 million