Question

Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $60 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 $46 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 $50 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. Prepare any entry necessary to achieve this reporting objective.

a. Record any necessary entry to report the investment at the correct value on the balance sheet. For December 31, 2018

4. 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

solution 1:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	1-Jan-18	Investment in Bond Dr	$60.00
		To Cash		$46.00
		To Discount on bond investment		$14.00
		(Being investment in bond recorded)
2	30-Jun-18	Cash Dr ($60 * 6% * 6/12)	$1.80
		Discount on bond investment Dr	$0.04
		To Interest revenue ($46*8%*6/12)		$1.84
		(Being revenue recognition for bond interest and discount amortized)
3	31-Dec-18	Cash Dr ($60 * 6% * 6/12)	$1.80
		Discount on bond investment Dr	$0.04
		To Interest revenue ($46.04*8%*6/12)		$1.84
		(Being revenue recognition for bond interest and discount amortized)

Solution 2:

Fuzzy Monkey report its investment in the December 31, 2018, balance sheet at fair value i.e. $50 million

Solution 3:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	31-Dec-18	Fair value adjustment Dr ($50 - $46 - $0.04 - $0.04)	$3.92
		To Unrealized holding gain or loss - NI		$3.92
		(Being adjusting entry to record investment at fair value)

Solution 4:

Statement of cash flows (Partial) For 2018
Particulars	Amount (In million)
Cash flow from operating activities:
Interest received	$3.60
Cash flow from investing activities:
Cash paid for purchase of investment	-$46.00