Mills Corporation acquired as a long-term investment $240 million of 6% bonds, d
ID: 2539325 • Letter: M
Question
Mills Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2018. Company management is holding the bonds in its trading portfolio. 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.
Explanation / Answer
Solution 1 & 2:
Solution 3:
As investment is categorized in held for trading category, therefore Mills will report investment in December 31, 2018 balance sheet at fair value of $270 million.
Solution 4:
Journal Entries - Mills Corporation Date General Journal Debit Credit 1-Jul-18 Investment in Bond - Held for Trading Dr $280,000,000.00 To Cash $280,000,000.00 (Being Investment made in bond and categorized under held for trading) 31-Dec-18 Cash Dr ($240,000,000 * 6% * 6/12) $7,200,000.00 To Interest Income ($280,000,000*4%*6/12) $5,600,000.00 To Investment in Bond - Held for Trading $1,600,000.00 (Being interest received and recorded at effective market rate)