Mills Corporation acquired as a long-term investment $260million of 5% bonds, dated July 1, on July 1, 2018. Companymanagement has positive intent and ability to hold the bonds untilmaturity. The market interest rate (yield) was 3% for bonds ofsimilar risk and maturity. Mills paid $300.0 million for the bonds.The company will receive interest semiannually on June 30 andDecember 31. As a result of changing market conditions, the fairvalue of the bonds at December 31, 2018, was $280.0 million.
Required:
1. & 2. Prepare the journal entry to recordMills’ investment in the bonds on July 1, 2018 and interest onDecember 31, 2018, at the effective (market) rate.
3. At what amount will Mills report its investmentin the December 31, 2018, balance sheet?
4. Suppose Moody’s bond rating agency upgraded therisk rating of the bonds, and Mills decided to sell the investmenton January 2, 2019, for $315 million. Prepare the journal entry torecord the sale.
