Question

Mills Corporation acquired as a long-term investment $300 million of 6% bonds, dated July 1, on July 1, 2018. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 4% for bonds of similar risk and maturity. Mills paid $350 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, 2018, was $325 million.

Required:
1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.
3. At what amount will Mills report its investment in the December 31, 2018, 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, 2019, for $360 million. Prepare the journal entries to record the sale.

Answer 1

Answer:Please see explanation for answers

Step-by-step explanation:

1. Journal to record the investment in bonds

Date Account title and explanation Debit Credit

July, 1 2018 Investment in Bonds $300,000,000

To Premium on Bond Investment $50,000,000

To Cash $350,000,000

2. To record interest on Bonds

Date Account title and explanation Debit Credit

December 31,2018 Cash $9,000,000

(300,000,000 x 6% x 6/12)

Interest Revenue

($350,000,000 × 4% x 6/12) $7,000,000

To Premium on bonds $2,000,000

3. The Amount to be reported in balance sheet is

Investment in Bonds $300,000,000

+Premium on bonds

(Original Premium $50,000,000 -Amortization (2,000,000) =48,000,000

Amount to be reported in Balance sheet= $348,000,000

4. Date Account title and explanation Debit Credit

January 2, 2019 Cash $360,000,000

To gain on sale $12,00,000 ($348,000,000 - $360,000,000)

To Investment in bonds $300,000,000

To Premium on bonds $48,000,000