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.
I did not get question 3 right, and the number i got is 278.4  

please show all the work and details for this question.

Thank you so much

Answer 1

The answer $278.4 is correct as the interest is received on semi-annual basis.

The amortization amount does not form part of the premium as on the given balance sheet date, hence it should be deducted from the original premium & the premium (after such deduction) should be added to the investment. Accordingly,z

Book Value of the investment in bonds: ($ in millions)

Investment amount in bonds		$240
Add: premium on bonds investments:
Original premium ($280 - $240)	$40
(-) Amortization amount as on 31/12/18	($1.6)	$38.4
Book value		$278.40

Amortization amount as on 31/12/2018:

Interest received semi-annually at 6% on $240 million = $7.2 million

Coupon interest comes out to be 4% on $280 million for 6 months = $5.6 million

Amortization amount = $7.2 million - $240 million = $1.6 million