Mills Corporation acquired as a long-term investment $220 million of 6% bonds, d
ID: 2549452 • Letter: M
Question
Mills Corporation acquired as a long-term investment $220 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 $270 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 $250 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 $280 million. Prepare the journal entries to record the sale.
Explanation / Answer
Answer 1.
Investment in Bonds 220
Premimum on Bond Investment 50
Cash 270
Answer 2
Cash (3% x 220) 6.6
Premium on Bonds 1.2
Interest Revenue (2% x 270) 5.4
Answer 3
Fair market value 250.0
Book value 220
Added: Premium (50 – 1.2) 48.8 268.8
Decrease in value 18.8
Entery :-
Unrealized holding loss (I/S) 18.8
Fair value adjustment 18.8
Answer 4
Fair market value 280
Book value 268.8
Increase in value 11.2
Entery :-
Fair value adjustment 11.2
Unrealized holding gain (I/S) 11.2