Question

Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $180 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 $160 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 $170 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

Date	General Journal	Debit	Credit
1, Jan	Investment in bonds	180m
	Discount on bond investment		20m
	Cash		160m

Date	Cash interest @3% x 180000000	Effective interest @4% x balance	Discount Amortization	Balance
Jan 1 2016				160000000
June 30 2016	5400000	6400000	1000000	161000000
Dec 31 2018	5400000	6440000	1040000	162040000

Date	General Journal	Debit	Credit
30, June	Cash	5400000
	Discount on bond investment	1000000
	Investment Revenue		6400000
31, Dec	Cash	5400000
	Discount on bond investment	1040000
	Investment Revenue		6440000

Investment in bonds		180000000
Discount on Bonds:
1/1 Value	20000000
6/30 Amortization	(1000000)
12/31 Amortization	(1040000)	(17960000)
Balance on 12/31		162040000
Fair value on 12/31		170000000
Fair Value Adjustment		7960000

General Journal	Debit	Credit
Fair Value Adjustment	7960000
Net Unrealized holding gain and losses		7960000

Impact of Statement of Cash Flows:

SOCF Section	Amount	Inflow/Outflow
Operating Activities	10800000	Inflow
Investing Activities	170000000	Outflow