Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $170 million of 10% bonds, dated January 1, on January 1, 2018. Management intends to have the investment available for sale when circumstances warrant. When the company purchased the bonds, management elected to account for them under the fair value option. For bonds of similar risk and maturity the market yield was 12%. The price paid for the bonds was $151 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 $160 million.

Required:
1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate).

- Record Fuzzy Monkey’s investment on bonds on January 1, 2018.

- Record the interest revenue on June 30, 2018.

- Record the interest revenue on December 31, 2018.
4-a. At what amount will Fuzzy Monkey report its investment in the December 31, 2018, balance sheet?

- Investment:
4-b. Prepare the journal entry necessary to achieve this reporting objective.

• Record any necessary entry to report the investment at the correct value on the balance sheet.

Note: Enter debits before credits.

	Date General Journal Debit Credit December 31, 2018

5. How would Fuzzy Monkey’s 2018 statement of cash flows be affected by this investment assuming Fuzzy anticipates holding these investments for a sufficiently long period?
- Operating Cash Flow:

- Investing Cash Flow:

Answer 1