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Problem #3 Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $275 million of 9% bonds,...

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Accounting

Problem #3 Fuzzy Monkey Technologies, Inc., purchased as along-term investment $275 million of 9% bonds, dated January 1, onJanuary 1, 2018. Management has the positive intent and ability tohold the bonds until maturity. For bonds of similar risk andmaturity the market yield was 6%. The terms of the bonds is 10years. Interest is received semiannually on June 30 and December31. Due to changing market conditions, the fair value of the bondsat December 31, 2018, was $300 million. Required:

1. Calculate the purchase price of the bonds.

2. Using the purchase price of the bond calculated in #1,prepare an amortization schedule for this bond.

3. Prepare the journal entries for:

a. January 1,2018

b. June 30, 2018

c. December 30, 2018

Answer & Explanation Solved by verified expert
4.4 Ratings (844 Votes)

Solution 1:

Computation of Bond Purchase Price
Table values are based on:
n= 20
i= 3.00%
Cash flow Table Value Amount Present Value
Par (Maturity) Value 0.5537 $275,000,000.00 $152,260,832
Interest (Annuity) 14.8775 $12,375,000.00 $184,108,751
Price of bonds $336,369,584

Solution 2:

Bond Amortization Schedule
Period Cash received Interest revenue Premium Amortized Carrying value
0 $336,369,584
1 $12,375,000 $10,091,088 $2,283,912 $334,085,671
2 $12,375,000 $10,022,570 $2,352,430 $331,733,241
3 $12,375,000 $9,951,997 $2,423,003 $329,310,239
4 $12,375,000 $9,879,307 $2,495,693 $326,814,546
5 $12,375,000 $9,804,436 $2,570,564 $324,243,982
6 $12,375,000 $9,727,319 $2,647,681 $321,596,302
7 $12,375,000 $9,647,889 $2,727,111 $318,869,191
8 $12,375,000 $9,566,076 $2,808,924 $316,060,266
9 $12,375,000 $9,481,808 $2,893,192 $313,167,074
10 $12,375,000 $9,395,012 $2,979,988 $310,187,087
11 $12,375,000 $9,305,613 $3,069,387 $307,117,699
12 $12,375,000 $9,213,531 $3,161,469 $303,956,230
13 $12,375,000 $9,118,687 $3,256,313 $300,699,917
14 $12,375,000 $9,020,998 $3,354,002 $297,345,915
15 $12,375,000 $8,920,377 $3,454,623 $293,891,292
16 $12,375,000 $8,816,739 $3,558,261 $290,333,031
17 $12,375,000 $8,709,991 $3,665,009 $286,668,022
18 $12,375,000 $8,600,041 $3,774,959 $282,893,062
19 $12,375,000 $8,486,792 $3,888,208 $279,004,854
20 $12,375,000 $8,370,146 $4,004,854 $275,000,000

Solution 3:

Journal Entries - Fuzzy Monkey Technologies Inc.
Event Date Particulars Debit Credit
1 1-Jan-18 Investment in Bond Dr $275,000,000.00
Premium on bond investment Dr $61,369,584.00
         To Cash $336,369,584.00
(Being investment in bond recorded)
2 30-Jun-18 Cash Dr $12,375,000.00
         To Interest revenue $10,091,088.00
         To Premium on bond investment $2,283,912.00
(Being revenue recognition for bond interest and premium amortized)
3 31-Dec-18 Cash Dr $12,375,000.00
         To Interest revenue $10,022,570.00
         To Premium on bond investment $2,352,430.00
(Being revenue recognition for bond interest and premium amortized)

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