Mills Corporation acquired as a long-term investment $300 million of 6% bonds, d
ID: 2596962 • 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 has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 4% for bonds of similar risk and maturity. Mills paid $350.0 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 $325.0 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 $360 million. Prepare the journal entry to record the sale.
Explanation / Answer
Answer Part 1 & 2
Journal Entries
Answer 3
Since management's intntion is hold the investment till maturity , thus it should record its investment at book value after adjusting the unamortized potion of premium on bond investment. The fair value as on December 31, 2018 given is not to be considered.
Answer 4
Journal Entry
Date Accounts Titles & Explanation Debit ($) in millions Credit ($) in millions July 1, 2018 Investment in the bonds 300 Premium on Bond Investment 50 Cash 350 ( To record purchase of bonds at premium) December 31, 2018 Cash ($300 million * 6 %) 18 Interest Income ($350.0 million *4 %) 14 Premium on Bond Investment 2 (To record interest income)