Question

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $90 million of 6% bonds, dated January 1, on January 1, 2018. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 8%. The price paid for the bonds was $73 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2018, was $80 million.

Required:
1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate).
4. At what amount will Fuzzy Monkey report its investment in the December 31, 2018, balance sheet?
5. How would Fuzzy Monkey's 2018 statement of cash flows be affected by this investment?

Answer 1

1 to 3
2018
Jan-01	Investments in Bonds	90000000
	Discount on bond investment	17000000
	Cash		73000000
Jun-30	Cash (90000000*3%)	2700000
	Discount on bond investment	220000
	Interest income (73000000*4%)		2920000
Dec-31	Cash (90000000*3%)	2700000
	Discount on bond investment	228800
	Interest income (73000000+220000)*4%		2928800
4)	Amount to be reported as investment on December 31, 2018 = 90000000-17000000+220000+228800 =	73448800
5)	Cash flow from operating activities:
	Interest income (inflow)	5400000
	Cash flow from investing activities:
	Investment in bonds (outflow)	-73000000