Problem 12-1 Securities held-to-maturity; bond investment; effective interest [L
ID: 2533317 • Letter: P
Question
Problem 12-1 Securities held-to-maturity; bond investment; effective interest [L012-1,12-2] Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $190 million of 8% bonds, dated January 1, on January 1, 2018. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $169 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 $180 million. Required 1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate). 4. At what amount will Fuzzy Monkey report its investment in the December 31, 2018, balance sheet? 5. How would Fuzzy Monkey's 2018 statement of cash flows be affected by this investment? Complete this question by entering your answers in the tabs below Req 1 to 3Req 4 Req 5 At what amount will Fuzzy Monkey report its investment in the December 31, 2018, balance sheet? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places, (i.e., 5,500,000 should be entered as 5.50).) Investment 161.48 illionExplanation / Answer
Date Cash Interest @ 4%*190 mn Effective interest @ 5%* Balance Discount amortization Balance Jan 1 2018 169000000 June 30 2018 7600000 8450000 850000 169850000 Dec 31 2018 7600000 8492500 892500 170742500 Fuzzy Monkey will report the investment at its unamortized cost of $170,742,500. The reason for this is that the security is classified as held-to-maturity. Investment in bonds $190,000,000 Discount on bonds 1/1 value (190 million-169 million) $21,000,000 6/30 amortization -850,000 12/31 amortization -892,500 19,257,500 Unamortized cost $170,742,500