Question

Mills Corporation acquired as an investment $240 million of 8% bonds, dated July 1, on July 1, 2021. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 6% 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, 2021, was $265 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. Prepare the journal entry by mills to record any fair value adjustment necessary for the year ended December 31, 2021.

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 $292 million. Prepare the journal entries required on the date of sale.

Answer 1

part 1 and 2

Date	Journal Entry	Dr. ($)	Cr. ($)
01/07/21	investment in bond	240000000
	premium on bond investment	40000000
	To cash		280000000
	(to record the investment in bond)
31/12/21	Cash (240000000*4%)	9600000
	To premium on bond		1200000
	To interest revenue (280000000*3%)		8400000
	(interest on bonds)

part 3

fair market value		265000000
book value + premium
book value	240000000
Premium (40000000-1200000)	38800000	278800000
decrease in book value (278800000-265000000)		13800000

Date	Journal Entry	Dr. ($)	Cr. ($)
31/12/21	unrealized holding gain or loss	13800000
	To fair value adjustment		13800000

part 4

Date	Journal Entry	Dr. ($)	Cr. ($)
02/01/22	cash	292000000
	To gain on sale		13200000
	To premium on bond (40000000-1200000)		38800000
	To investment on bond		240000000