Mills Corporation acquired as a long-term investment $260 million of 5% bonds, d
ID: 2571224 • Letter: M
Question
Mills Corporation acquired as a long-term investment $260 million of 5% bonds, dated July 1, on July 1, 2018. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 3% for bonds of similar risk and maturity. Mills paid $300 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 $280 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 $315 million. Prepare the journal entries to record the sale. (Record the updating the fair-value adjustment.; Record the sale of the investment by Mills.)
Explanation / Answer
3. Mills Report its Investment in the December31,2018 balance sheet is $ 280 million because as per the standardes the value of the invesment is Cost or Market value which ever is lower in case of mills the cost of Bonds is $300 million and markect value as on date is $280 Million so the value of investment is taken $280 Millions.
4. A. as on december 31,2018 the fair market value of bond is $ 280 Millions so the entry pass as follows..
Fari Value Adjustment of Bond A/c $20millions
To Bonds A/c $20millions
B. Investment Sale on January 2,2019 for $315 millions.
Bank A/c $315 millions
To Bonds A/c $280Millions
To Fari Value Adjustment of Bond A/c $20Millions
To Profit on Sale of Bonds A/c $15Millions