Question

E 12-2 Securities held-to-maturity; bond investment; effective interest, premium LO12-1 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: Page 695 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.

Answer 1

Journal Entries - Mills Corporation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	1-Jul-18	Investment in Bond Dr	$240.00
		Premium on bond investment Dr	$40.00
		To Cash		$280.00
		(Being investment in bond recorded)
2	31-Dec-18	Cash Dr ($240 * 6% * 6/12)	$7.20
		To Premium on bond investment		$1.60
		To Interest revenue ($280*4%*6/12)		$5.60
		(Being revenue recoginition for bond interest and discount amortized)
3	31-Dec-18	Unrealized holding gain or loss - OCI Dr	$8.40
		To Fair value adjustment Dr ($280 - $270 - $1.60)		$8.40
		(Being adjusting entry to record investment at fair value)
4	2-Jan-19	Fair value adjustment Dr	$8.40
		To Reclassification adjustment - OCI		$8.40
		(Being reversal of fair value adjustment at the time of sale)
5	2-Jan-19	Cash Dr	$290.00
		To Preimum on bond investment		$38.40
		To Investment in Bond		$240.00
		To Gain on sale of investment		$11.60
		(To record sale of investment)

It is a gain as the bonds are sold at higher price than its carrying value

Answer 2

Journal Entries - Mills Corporation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	1-Jul-18	Investment in Bond Dr	$240.00
		Premium on bond investment Dr	$40.00
		To Cash		$280.00
		(Being investment in bond recorded)
2	31-Dec-18	Cash Dr ($240 * 6% * 6/12)	$7.20
		To Premium on bond investment		$1.60
		To Interest revenue ($280*4%*6/12)		$5.60
		(Being revenue recoginition for bond interest and discount amortized)
3	31-Dec-18	Unrealized holding gain or loss - OCI Dr	$8.40
		To Fair value adjustment Dr ($280 - $270 - $1.60)		$8.40
		(Being adjusting entry to record investment at fair value)
4	2-Jan-19	Fair value adjustment Dr	$8.40
		To Reclassification adjustment - OCI		$8.40
		(Being reversal of fair value adjustment at the time of sale)
5	2-Jan-19	Cash Dr	$290.00
		To Preimum on bond investment		$38.40
		To Investment in Bond		$240.00
		To Gain on sale of investment		$11.60
		(To record sale of investment)

It is a gain as the bonds are sold at higher price than its carrying value