Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $220 million of 8% bonds, dated January 1, on January 1, 2021. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $201 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, 2021, was $210 million.

Question

Keith Blackwell

Business

14 June, 01:34

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $220 million of 8% bonds, dated January 1, on January 1, 2021. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $201 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, 2021, was $210 million.

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Teagan Cardenas · Answer 1

1 Jan 2021 - Debit Investment $220 million, Credit Bank $201 million, Credit Discount received $19 million.

30 June 2021 Debit Bank $8,800,000 Credit Interest income $8,800,000

31 December Debit Bank $8,800,000 Credit Interest income $8,800,000

31 December 2021 Debit Fair value loss $10 million, Credit Investment $10 million.

Explanation:

Required: prepare journal entries.

interest income = 220 million * 0.08 * 6/12 = $8,800,000

fair value gain or loss = opening fair value - fair value at the end of the year

= 220 million - 210 million

= $10 million