Mills Corporation acquired as a longterm investment 270 mill

Mills Corporation acquired as a long-term investment $270 million of 8% bonds, dated July 1, on July 1, 2018. Mills determined that it should account for the bonds as an available-for-sale investment. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Mills paid $310 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 $290 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 $320 million. Prepare the journal entries to record the sale.

Solution

1 & 2) Journal Entries (Amount in million $)

3) As Mills account for the bonds as an available-for-sale investment, therefore Mills will report its investment in December 31, 2018 balance sheet at the fair value of the bonds at December 31, 2018. Thus the investment will be reported at the value of $290 million in the December 31, 2018, balance sheet.

4) Journal Entries (Amount in million $)