Mills Corporation acquired as a long-term investment $300 million of 6% bonds, d
ID: 2547715 • Letter: M
Question
Mills Corporation acquired as a long-term investment $300 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 $350 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 $325 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 $360 million. Prepare the journal entries to record the sale.
Explanation / Answer
1 & 2) Journal entries to record investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate is shown as follows:-
Journal Entries (Amount in million $)
3) Mills will report its investment in the December 31, 2018, balance sheet at its fair value i.e. $325 million
4) Journal Entries to record the sale (Amount in million $)
Date General Journal Debit Credit July 1, 2018 Investment in Bonds 300 Premium on bond investment (350-300) 50 Cash 350 (To record the investment in bonds) Dec. 31, 2018 Cash (300 million*6%*6/12) 9 Premium on bond investment (9-7) 2 Interest Revenue (350 million*4%*6/12) 7 (To record the interest revenue)