Chapter 12, Problem 12.3P

Securities available-for-sale; bond investment; effective interest

• LO 12-1, LO12-4

(Note: This problem is a variation of P12–1, modified to categorize the investment as securities available-for-sale.)

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $80 million of 8% bonds, dated January 1, on January 1, 2018. Management intends to have the investment available for sale when circumstances warrant. 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 December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2018, was $70 million.

Required:

1. 1. Prepare the journal entry to record Fuzzy Monkey’s investment on January 1, 2018.
2. 2. Prepare the journal entry by Fuzzy Monkey to record interest on June 30, 2018 (at the effective rate).
3. 3. Prepare the journal entries by Fuzzy Monkey to record interest on December 31, 2018 (at the effective rate).
4. 4. At what amount will Fuzzy Monkey report its investment in the December 31, 2018, balance sheet? Why? Prepare any entry necessary to achieve this reporting objective.
5. 5. How would Fuzzy Monkey’s 2018 statement of cash flows be affected by this investment?