Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $120 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 $100 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 $110 million Required: 1. to 2. 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? 3. How would Fuzzy Monkey's 2018 statement of cash flows be affected by this investment?

Answer 1

Date	General Journal	Debit	Credit
1-Jan	Investment in bonds	120
	Discount on bond investment			20
	Cash			100
Date	Cash Interest @ 3% * 120000000	Effective interest @ 4% * Balance	Discount amortiziation	Balance
1-Jan				100000000
30-Jun	3600000	4000000	400000	100400000
31-Dec	3600000	4016000	416000	100816000
30-Jun	Cash	3600000
	Discount on bond Investment	400000
	Interest revenue		4000000
31-Dec	Cash	3600000
	Discount on bond Investment	416000
	Interest revenue		4016000
Investment in bonds		120,000,000
Discount on bonds
1/1 Value	20000000
6/30 amortization	-400000
12/31 Amortization	-416000	-19184000
Unamortized cost		100816000