Mills Corporation acquired as a long-term investment $240 million of 6% bonds, d
ID: 2328558 • Letter: M
Question
Mills Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2018. Mills determined that it should account for the bonds as an available-for-sale investment. The market interest rate (yield) was 4% for bonds of similar risk and maturity. Mills paid $280 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $270 million.
Required:
1& 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.
3. At what amount will Mills report its investment in the December 31, 2018, balance sheet?
4. Suppose Moody’s bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2019, for $290 million. Prepare the journal entries to record the sale.(If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).
No
Event
General Journal
Debit
Credit
Req #4:
how to compute reclassification-OCI and fair value adjustment
1
1
Fair value adjustment, AFS investment
20
Unrealized holding gain—OCI
20
2
2
Cash
290.0
Gain on sale of investments
11.6
Premium on bond investment
38.4
Investment in bonds
240.0
3
3
Reclassification adjustment—OCI
?
Fair value adjustment, AFS investment
?
Explanation / Answer
1&2 Amount in millions particulars Debit Credit investment in bond a/c Dr 240 premium on bond investment a/c Dr 40 to cash a/c 280 2 Cash a/c Dr( 240*3%) 7.2 to premium on Bonds 1.6 to interest revenue(2800*2%) 5.6 3) Particulars amount investment in bonds 240 premium on bonds: original premium 40-1.6 38.4 book value 278.4 4) cash Dr 290 to gain on sale 11.6 to premium on bonds 38.4 to investment in bonds 240