Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $180 milli
ID: 2544302 • Letter: F
Question
Fuzzy Monkey Technologies, Inc., purchased as a short-term investment $180 million of 6% bonds, dated January 1, on January 1, 2018. Management intends to include the investment in a short-term, active trading portfolio. For bonds of similar risk and maturity the market yield was 8%. The price paid for the bonds was $160 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 $170 million.
Required:
1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate).
4-a. At what amount will Fuzzy Monkey report its investment in the December 31, 2018, balance sheet?
4-b. Prepare any entry necessary to achieve this reporting objective.
5. How would Fuzzy Monkey's 2018 statement of cash flows be affected by this investment?
Explanation / Answer
Date
General Journal
Debit
Credit
1, Jan
Investment in bonds
180m
Discount on bond
investment
20m
Cash
160m
Date
Cash interest @3% x 180000000
Effective interest @4% x balance
Discount Amortization
Balance
Jan 1 2016
160000000
June 30 2016
5400000
6400000
1000000
161000000
Dec 31 2018
5400000
6440000
1040000
162040000
Date
General Journal
Debit
Credit
30, June
Cash
5400000
Discount on bond
investment
1000000
Investment Revenue
6400000
31, Dec
Cash
5400000
Discount on bond
investment
1040000
Investment Revenue
6440000
Investment in bonds
180000000
Discount on Bonds:
1/1 Value
20000000
6/30 Amortization
(1000000)
12/31 Amortization
(1040000)
(17960000)
Balance on 12/31
162040000
Fair value on 12/31
170000000
Fair Value Adjustment
7960000
General Journal
Debit
Credit
Fair Value Adjustment
7960000
Net Unrealized holding gain and losses
7960000
Impact of Statement of Cash Flows:
SOCF Section
Amount
Inflow/Outflow
Operating Activities
10800000
Inflow
Investing Activities
170000000
Outflow
Date
General Journal
Debit
Credit
1, Jan
Investment in bonds
180m
Discount on bond
investment
20m
Cash
160m
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