[This is a variation of E 12-2 focusing on available-for-sale securities.] Mills

Question

[This is a variation of E 12-2 focusing on available-for-sale securities.] Mills Corporation acquired as a long-term investment $240 million of 6% 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 4% 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 $270 million. Required: 1. Prepare the journal entry to record Mills' investment in the bonds on July 1, 2018. 2. Prepare the journal entries by Mills to record 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? Why? 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 $290 million. Prepare the journal entry to record the sale.

Explanation / Answer

Mills Corporation Amount in 'Million' Requirement 1 Date Account title & Explanation Debit Credit Amount in $ Amount in $ January 01, 2018 Investment in Bonds 240 Premium on Bonds Investment 40 Cash 280 Requirement 2 Date Cash Interest Effective Interest Premium Amortization Balance January 01, 2016 280 June 30, 2016 7.2 5.6 1.6 278.4 December 30, 2106 7.2 5.568 1.632 276.768 June 30, 2018 Cash 7.2 Premium on Bonds Investment 1.6 Interest Revenue 5.6 December 30, 2018 Cash 7.2 Premium on Bonds Investment 1.632 Interest Revenue 5.568 Requirement 3 Mills corporation will report its Investment in December 31, 2016 Balance sheet at Face value + unamortized Premium, as Its intends to hold the investment till its maturiy Reporting of Investment at 276.768 Million Requirement 4 Date Account title & Explanation Debit Credit Amount in $ Amount in $ January 2, 2019 Cash 290 Investment in Bonds 276.768 Realised gain on Investment in bonds 13.232

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