Question

Mills Corporation acquired as a long-term investment $240 million of 7% 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 5% for bonds of similar risk and maturity. Mills paid $280.0 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 $260.0 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 $290 million. Prepare the journal entry to record the sale.

Answer 1

Date	Account Title & Explanation	Debit ($)	Credit ($)
1 july 2021	Investment in bond	$240 million
	Premium on bond investment	$40 million
	To cash		$280 milloin
	(To record the investment in bond)
31 dec 2021	Cash ($240*7/2%)	$8.4 million
	To premium on bond		$ 1.4 million
	To interest revenue($280*5/2%)		$ 7 million
	(To record interest on bonds)

2) Mills report its investment in the December 31, 2021, balance sheet?

Particular	Amaount
Investment in bonds	$240
Add - Premium on Investment in Bonds	$40
Premium on investment in Bonds amortized	-$1.4
Carrying Value	$ 298.6

Date	Account Title & Explanation	Debit ($)	Credit ($)
2 jan 2022	Cash	$290
	To investment in bond		$240
	To premium on bond( 40-1.4)		$ 38.6
	To gain on sale (bal.fg)		$ 11.4
	(record sale of bond )