Question

Mills Corporation acquired as a long-term investment $230 million of 8% bonds, dated July 1, on July 1, 2018. Company management has positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Mills paid $260.0 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 $250.0 million. Required: 1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2018 and 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? 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 $270 million. Prepare the journal entry to record the sale.

Answer 1

SOLUTION

1 & 2. Journal Entry-

S.No.	Accounts title and Explanation	Debit ($)	Credit ($)
1.	Investment in Bonds	230,000,000
	Premium on Bond Investment	30,000,000
	Cash		260,000,000
	(To record the investment in bonds)
2.	Cash ($230,000,000* 4%)	9,200,000
	Premium on bonds		1,400,000
	Interest Revenue ($260,000,000*3%)		7,800,000
	(To record interest on December 31, 2018 )

3. Amount to be reported in balance sheet-

	Amount ($)	Amount ($)
Investment in Bonds		230,000,000
Premium on bonds-
Original Premium	30,000,000
12/31/18 Amortization	(1,400,000)	28,600,000
Book value		258,600,000

4.

Accounts title and Explanation	Debit ($)	Credit ($)
Cash	270,000,000
Gain on sale		11,400,000
Premium on bonds		28,600,000
Investment in bonds		230,000,000