Question

PROBLEM II: Trading Securities

MBS Corporation acquired as long-term investment $500 million of 8% bond on July 1, 2020. The market interest rate (yield) was 12% for bonds of similar risk and maturity. MBS paid $450 million for the bonds. The company will receive interest semiannually on June 30 and December 31. Company management is holding the bonds in its trading portfolio. As a result of changing market condition, the fair value of the bonds at December 31, 2020, was $452 million.

Required;

1. Prepare journal entry to record MBS’s investment in the bonds on July 1, 2020.

Journal Entry – July 1, 2020

2. Prepare the journal entries by MBS to record interest on December 31, 2020, at the effective (market) rate.

Journal Entry – December 31, 2020

3. Prepare additional journal entry necessary for MBS to report its investment in the December 31, balance sheet.

Journal Entry – December 31, 2020

4. Suppose Moody’s bond rating agency downgraded the risk rating of the bonds motivating MBS to sell the investment on January 2, 2021, for $ 455 million. Prepare the journal entry to record the sale.

1) Updating the fair-value adjustment:

Journal Entry – January 2, 2021

2) Recording the sale transaction:

Journal Entry – January 2, 2021

Answer 1

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