Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $100 millio
ID: 2560116 • Letter: F
Question
Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $100 million of 8% 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 10%. The price paid for the bonds was $82 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 $90 million.
Required:
1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate).
4. At what amount will Fuzzy Monkey report its investment in the December 31, 2018, balance sheet?
5. How would Fuzzy Monkey's 2018 statement of cash flows be affected by this investment?
Explanation / Answer
Answer 1 to 3
Working Note
Computation of Interest Revenue & Discount amortization for the year
Date
A
Actual Int received ($) : 4 % * $100,000,000
B
Effective Interest ($):
C = 5% * balance
Discount Amortizaion($)
D =C- B
Balance ($)
F
Journal Entries
Answer 4
Fuzzy Monkey should report its investment in the December 31, 2018, balance sheet at $82,205,000 (refer the "Balance' colomn in above woking note for calculation)
Explanation : Since the investment held for maturity , it should be recorded at (Cost - amortized discount for for the year) & given Fair value for December 31 should be ignored.
Answer 5
Fuzzy Monkey's 2018 statement of cash flows as affected by this investment
Date
A
Actual Int received ($) : 4 % * $100,000,000
B
Effective Interest ($):
C = 5% * balance
Discount Amortizaion($)
D =C- B
Balance ($)
F
January 1, 2018 82,000,000 June 30 , 2018 4,000,000 5 % * 82,000,000 = 4,100,000 100,000 82,100,000 December 31, 2018 4,000,000 5 %* 82,100,000 =4,105,000 105,000 82,205,000Related Questions
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