Can anyone help with step by step instructions on how to solve. I understand som

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Can anyone help with step by step instructions on how to solve. I understand some but not all. thanks

Problem 12-3 Securities available-for-sale; bond investment; effective interest [LO12-3] Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $190 million of 8% bonds, dated January 1, on January 1, 2013. Management intends to have the investment available for sale when circumstances warrant. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $169 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2013, was $180 million. Required: 1. Prepare the journal entry to record Fuzzy Monkey’s investment on January 1, 2013. (Enter your answers in millions.) General Journal Debit Credit 2. Prepare the journal entry by Fuzzy Monkey to record interest on June 30, 2013 (at the effective rate). (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places.) General Journal Debit Credit 3. Prepare the journal entry by Fuzzy Monkey to record interest on December 31, 2013 (at the effective rate). (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places.) General Journal Debit Credit 4-a. At what amount will Fuzzy Monkey report its investment in the December 31, 2013, balance sheet? (Do not round your intermediate calculations. Enter your answer in millions.) Investment $ million 4-b. Prepare any entry necessary to achieve this reporting objective. (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places.) General Journal Debit Credit 5. How would Fuzzy Monkey’s 2013 statement of cash flows be affected by this investment? (Do not round your intermediate calculations. Enter your answers in millions rounded to 1 decimal place. Input all amounts as positive values.) Operating cash flow $ Investing cash flow $

Explanation / Answer

First we will find out the maturity period of bonds

The yield to maturity is 10% ,

Interest is 8 % that is $ 190 millions * 8% = $ 15.2 millions yearly

So The price of bonds that is $ 169 millions is the present value of all the cash inflows (interest) and redemption value.

Using excel found years remaining to maturity is 8 years.

1. Journal entry for investment in bonds

INVESTMENT IN BONDS. DEBIT $ 190 millions

DISCOUNT ON INVESTMENT IN BONDS CREDIT $ 21 millions

CASH. CREDIT $ 169 millions

The Discount on bonds account will be adjusted with interest revenue over the life of bonds .

2. At the time of interest received as on 30 th June 2013. Interest at effective rate of 4 %= 190 millions * 4 %

Cash Debit. $ 7.6 millions

DISCOUNT ON INVESTMENT IN BONDS (Difference) DEBIT. $ .85 millions

Interest Income. (169*5%) Credit. $ 8.45 millions

Effective yield for 6 months = 10/2 = 5%

Difference =169*5% less 190 *4%

= $ 8.45 millions less $ 7.6 millions = .85 millions

Value of bonds Now is = 169 + .85 = $ 169.85 millions

3. Journal Entry for Interest received on 31 December 2013

Cash Debit. $ 7.6 millions

DISCOUNT ON INVESTMENT IN BONDS (Difference) DEBIT. $ .8925 millions $millions

Interest Income. (169.85*5%) Credit. $ 8.4925 millions

4. Fair value adjustment as on 31 December 2013 - First we have to determine the carrying value or amortised cost of bonds as on 31 December 2013.

Investment in bonds =. $ 190 millions

Less- discount on investment in bonds ($.85 millions + $ .8925 millions) = ($ 1.7425 )millions

Amortised Cost = $ 188.2575 millions

• NOW WE HAVE TO DECREASE THE VALUE TO $ 180 millions ie 188.2575 - 180 = $ 8.2575 millions

Journal Entry

Unrealised loss on investment in bonds debit $ 8.2575 millions

Fair value adjustment on investment in bonds credit. $ 8.2575 millions

The fair value adjustment account will be combined with INVESTMENT IN BONDS ACCOUNT SO VALUE OF THESE AS ON 31 December 2013 , $ 180 millions will be shown in balance sheet.

Requirements 5

Fuzzy monkey ‘s statement of cash flows 2013 would be affected as follows:

Operating cash flows: Cash inflow from interest of $7.6+ $7.6 millions = $15.2 millions

Note: if Fuzzy Monkey prepares an indirect method statement of cash flows, they would have included in net income interest revenue of $8.45+ $8.4925 millions = $16.9425 millions and an unrealized holding Loss of $ 8.2575 millions $ Net effect $8.6849 millions increase in revenue so would have to include an adjustment of = $ 8.6849 to get from net income to the correct operating cash flow.)

Investing cash flows: Cash outflow from purchasing investments of $169 .

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