Mills Corporation acquired as a long-term investment $290 million of 8% bonds, d
ID: 2551206 • Letter: M
Question
Mills Corporation acquired as a long-term investment $290 million of 8% bonds, dated July 1, on July 1, 2018. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Mills paid $340 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 $330 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 $350 million. Prepare the journal entries to record the sale.
At what amount will Mills report its investment in the December 31, 2018, balance sheet? (Enter your answer in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)
million
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 $350 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).)
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Investment $338.6selected answer incorrectmillion
Explanation / Answer
1 & 2) Journal entry: Debit $ Credit $ July 1 2018 Bond Receivables $290m Premium on Bond Receivables $50m Cash $340m Dec 31 2018 Cash 11.6m Interest Revenue 10.20m Premium on Bond Receivables 1.40m (340*3% - 290*4%)=$1.40m 3) Balance Sheet abstract : Assets: Bonds Receivables = $290m add: Premium on bonds receivables = 48.60 Net Bonds Receivables = $338.60 4) Fair value valuation: Dec 31 2018 Allowance for revaluation 10m Bonds Receivables 10m Sale of Bonds: jan 2 2019 Cash 350m Premium on Bond Receivables 48.6m Bonds Receivables 290m Allowance for revaluation 10m Income on sale of bonds 1.4m