Question

Mills Corporation acquired as a long-term investment $260 million of 6% bonds, dated July 1, on July 1, 2021. 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 $300.0 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, 2021, was $280.0 million.

Required:
1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate.
3. At what amount will Mills report its investment in the December 31, 2021, 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, 2022, for $314 million. Prepare the journal entry to record the sale.

Answer 1

	Journal Entries	(Amount In Millions)
	Date	Particulars	Debit($)	Credit($)
1	07.01.2021	Investment in Bonds A/c	260
		Premium on Bond Investment A/c	40
		Cash		300
		(To record investments in Bonds)
2	12.31.2021	Cash A/c ( (6/2) %* 260)	7.8
		Premium on Bonds A/c(7.8 million-6 million)		1.8
		Interest Revenue A/c ( (4/2) %* 300)		6
		(To record Interest)
3.		Fair Market Value		280
		Book Value	260
		Add:Premium on Bonds ( 40 - 1.8)	38.2	298.2
		Amount to be reported in Balance sheet=		298.2
4.	1.2.2022	Cash	314
		Premium on Bonds A/c		38.2
		Gain On sale A/c		15.8
		Investment in Bonds A/c		260
		(To record the sale)