Mills Corporation acquired as a long-term investment $280 million of 6% bonds, d
ID: 2571212 • Letter: M
Question
Mills Corporation acquired as a long-term investment $280 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 $330.0 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 $320.0 million.
Required:
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 $340 million. Prepare the journal entry to record the sale.
Req 1 and 2 Req 3 Req 4 At what amount will Mills report its investment in the December 31, 2018, balance sheet? (E rounded to 1 decimal place, .e., 5,500,000 should be entered as 5.5).) Investment 320. millionExplanation / Answer
Preparing the Journal Entries to Record Tanner-UNF's Investment Bonds on July1, 2018 at the Effective Market Rate:
Date
General Journal
Debit
Credit
July 1, 2018
Investment in Bonds
$280,000,000
premium Bond Investment ($280,000,000 - $330,000,000)
$50,000,000
Cash
$330,000,000
(To Record the Investment in the Bonds)
Dec 31, 2018
Cash (3% * 280,000,000)
$8,400,000
Discount on Bonds
$180,000
Interest Revenue (2% * 330,000,000)
$6,600,000
(To Record the Interest on Effective Rate)
3) Preparing the additional journal entry necessary for tanner-UNF to report its investment in the december 31, 2018, balance sheet:
Fair Market Value
$320,000,000
Book Value
$280,000,000
Add: premium ($50,000,000 - $180,000)
$49,820,000
$329,820,000
Decrease in Value
$9,820,000
Date
General Journal
Debit
Credit
Dec 31, 2018
Fair value adjustment
$9,820,000
Unrealized holding loss (I/S)
$9,820,000
4) Preparing the Journal Entry Necessary to Record the Sale, including Updated Fair Value Adjustment, Recording any reclasification adjustment and recording the sale:
Fair value
$340,000,000
Book value
$329,820,000
Increase in value
$10,180,000
Event
General Journal
Debit
Credit
1
Unrealized holding gain (I/S) ($10,180,000 + $9,820,000)
$20,000,000
Fair value adjustment
$20,000,000
2
Cash
$340,000,000
Fair value adjustment
$10,180,000
Gain on sale of investment
$49,820,000
Investment in bonds
$280,000,000
Date
General Journal
Debit
Credit
July 1, 2018
Investment in Bonds
$280,000,000
premium Bond Investment ($280,000,000 - $330,000,000)
$50,000,000
Cash
$330,000,000
(To Record the Investment in the Bonds)
Dec 31, 2018
Cash (3% * 280,000,000)
$8,400,000
Discount on Bonds
$180,000
Interest Revenue (2% * 330,000,000)
$6,600,000
(To Record the Interest on Effective Rate)