Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $80 million
ID: 2544301 • Letter: F
Question
Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $80 million of 6% bonds, dated January 1, on January 1, 2018. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 8%. The price paid for the bonds was $64 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, 2018, was $70 million.
Required:
1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate).
4. At what amount will Fuzzy Monkey report its investment in the December 31, 2018, balance sheet?
5. How would Fuzzy Monkey's 2018 statement of cash flows be affected by this investment?
Explanation / Answer
1. Journal entry for investment on Jan 1
Investment in bond a/c debit 8,00,00,000
To Discount on bond investment 1,60,00,000
To Cash/ Bank a/c 6,40,00,000
(Being long term bond purchases on discounted price)
2. Journal Entry for Interest received June 30
Cash/Bank a/c debit 24,00,000
Discount on bond investment debit 1,60,000
To Interest revenue a/c credit 25,60,000
(Being interest received semiannually @ 8%)
3. Journal Entry for Interest received Dec 31
Cash/Bank a/c debit 24,00,000
Discount on bond investment debit 1,66,400
To Interest revenue a/c credit 25,66,400
(Being interest received semiannually @ 8%)
4. Fuzzy Monkey will report the investment at its fair value of $70 million. The reason for this is that the investment will be classified as a trading security
Fair value adjustment debit 5,673,600
Unrealized holding gain a/c credit 5,673,600
(Being unrealised gain recorded)
Date Interest @ 3% on 8,00,00,000 Effective Interest @ 4% Discount Amortisation Balance Jan-01 6,40,00,000 Jun-30 24,00,000 25,60,000 1,60,000 6,41,60,000 Dec-31 24,00,000 25,66,400 1,66,400 6,43,26,400Related Questions
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