Fuzzy Monkey Tech, Inc., purchased $80 million of 8% bonds, dated Jan. 1, on Jan

Question

Fuzzy Monkey Tech, Inc., purchased $80 million of 8% bonds, dated Jan. 1, on Jan. 1, 2016. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $66 million. Interest is received semiannually on June 30 and Dec. 31. Due to changing market conditions, the fair value of the bonds at Dec. 31, 2016, was $70 million.

1) Prepare the journal entry to record the investment on Jan. 1, 2016.

2) Prepare the journal entries to record interest on 6/30 &12/31, 2016.

3a) At what amount will Fuzzy Monkey report its investment on the 12/31/2016 balance sheet if management has the positive intent and ability to hold the bonds until maturity?

3b) At what amount will Fuzzy Monkey report its investment on the 12/31/2016 balance sheet if management intends to sell it quickly? Prepare any entry necessary.

3c) At what amount will Fuzzy Monkey report its investment on the 12/31/2016 balance sheet if management intends to have the investment available for sale when circumstances warrant? Prepare any entry necessary.

Explanation / Answer

Date/S. N. Accounts Title & Explanation Debit Credit Amount in $ Amount in $ 1) Jan 1, 2016 Investment in Bonds 66000000 Cash 66000000 To record the payment for the purchase of bonds 2) June, 30, 2016 Cash 3200000 Interest Income on Bonds 3200000 To record the receipt of Interest income on Bonds December 31, 2016 Cash 3200000 Interest Income on Bonds 3200000 To record the receipt of Interest income on Bonds 3a) Held unto maturity =Purchase price+amortized discount Where Purchase price is 66000000 & Amortized discount will be Difference between Interest received and Interest rate of market Market Interest rate =66000000*5%                       = 3300000 Actual Interest received 3200000 Difference 100000    * 2 as Its semi annual Interest Paymen 200000 So, Held to Maturity Investment will be shown at 66000000+200000                     i.e. 66200000 However, In the case of Held to Maturity Investment our initial entry will change and so does our Interest received entry. But since maturity of bonds not given we can not recognize the discount on Bonds. but we can pass the following entry Date/S. N. Accounts Title & Explanation Debit Credit Amount in $ Amount in $ June 30, 2016 Discount on Bonds 100000 Interest Income 100000 To record discount on bonds as interest income December 31, 2016 Discount on Bonds 100000 Interest Income 100000 To record discount on bonds as interest income 3b) It's called trading security and its reported at its fair value                    i.e. 70000000 Date/S. N. Accounts Title & Explanation Debit Credit Amount in $ Amount in $ December 31, 2016 Investment in Bonds 4000000 Unrealized gain(Income statement) 4000000 To record the change in fair value of Investment 3c) Investment available for sale is reported at its fair value                    i.e. 70000000 Date/S. N. Accounts Title & Explanation Debit Credit Amount in $ Amount in $ December 31, 2016 Investment in Bonds 4000000 Change in fair Value of available for sale Investment(OCIS-Equity) 4000000 To record the unrealized gain on Investment

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