Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $160 million of 8% bonds, dated January 1, on January 1, 2021. 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 $142 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, 2021, was $150 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, 2021 balance sheet? 5. How would Fuzzy Monkey's 2021 statement of cash flows be affected by this investment? (If more than one approach is possible, indicate the one that is most likely.) Complete this question by entering your answers in the tabs below. Req 1 to 3 Req 4 Req 5 Prepare the relevant journal entries on the respective dates (record the interest at the effective rate). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places, (i.e., 5,500,000 should be entered as 5.50).) View transaction list Journal entry worksheet < 2 3 > Record the interest revenue on June 30, 2021. Note: Enter debits before credits.

Answer 1

1 to 3

prepare journal enteries as follows:

Date	Accounts title & Explanation	Debit $ (in millions)	Credit $ (millions)
1-jan 2021	investment in bonds(face value)	160
	Discount on bond investment	18
	cash (purchase price of bonds)		142
30-june	cash (4% * 160million)	6.4
	Discount on bond investment	0.7
	interest revenue(5% * 142)		7.1
31-dec	cash(4% * 160million)	6.4
	Discount on bond investment	0.735
	interest revenue(5% * 142+0.7)		7.135

Calculate values in above journal enteries as follows:-

Date	Accounts title & Explanation	Debit	Credit
1	investment in bonds(face value)	160
2	Discount on bond investment	=3-1
3	cash (purchase price of bonds)		142
4
5	cash (4% * 160million)	=160*4%
6	Discount on bond investment	=6-7
7	interest revenue(5% * 142)		=142*5%
8
9	cash(4% * 160million)	160*4%
10	Discount on bond investment	11-9
11	interest revenue(5% * 142+0.7)		(142+0.7)*5%

4.

Investment will be reported in the balancesheet as follows:-

	(in millions)
Investment in bonds	160
Less:Discount (18-0.7-0.735)	16.565
Amortized Cost	143.435
Note: Investment will be reported in the balancesheet at its amortized cost

5.

The cashflow statement will be affected by this investment as follows:-

Operating cashflow	$12.8 millions	inflow
Investing cashflow	$142 millions	outflow