Mills Corporation acquired as a long-term investment $245 million of 8% bonds, d
ID: 2596969 • Letter: M
Question
Mills Corporation acquired as a long-term investment $245 million of 8% 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 6% for bonds of similar risk and maturity. Mills paid $280 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 $260 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 $295 million. Prepare the journal entry to record the sale.
Explanation / Answer
1)
Journal entry to record Mills’ investment in the bonds on July 1, 2018:
Investment in Bond Dr 245 million
Premium on Bond Dr 35 million
Cash Cr 280
2)
Journal entry to record interest on December 31, 2018, at the effective (market) rate
Cash Dr 9.8 (245*8%*1/2)
Interest revenue Cr 8.4 (280*6%*1/2)
Premium on Bond Cr 1.4
3)
Investment in Bond as on December 31, 2018 = Fair value of Bond = 260 million
4)
Journal entry to record the sale:
Cash Dr 295
Investment in Bond Cr 260
Premium on Bond Cr 18.6 [(35 - 1.4) - (260 - 245)]
Gain on sale of Bond Cr 16.4