Problem 12‐1

Fuzzy Monkey Technologies, Inc., purchased as a long-term

investment $80 million of 8% bonds, dated January 1, on January
1, 2018. 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 $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.
Part 1: Prepare the journal entry to record Fuzzy Monkey’s
investment on January 1, 2018.
Investment in bonds 80
Discount on bond investment 14
Cash 66

© Dr. Chula King

All Rights Reserved

Problem 12-1 (continued)

Parts 2 and 3: Prepare the journal entries by Fuzzy Monkey to record
the interest on June 30, 2018 and December 31, 2018.

Cash Effective
Interest Interest
@4% x @5% x Discount
Date 80,000,000 Balance Amortization Balance
Jan. 1, 2018 66,000,000
June 30, 2018 3,200,000 3,300,000 100,000 66,100,000
Dec. 31, 2018 3,200,000 3,305,000 105,000 66,205,000
June 30Cash 3,200,000
Discount on bond investment 100,000
Interest revenue 3,300,000
Dec. 31 Cash 3,200,000
Discount on bond investment 105,000
Interest revenue 3,305,000

© Dr. Chula King

All Rights Reserved

Problem 12-1 (continued)

Part 4: At what amount will Fuzzy Monkey report its investment in
the December 31, 2018 balance sheet? Why?
Fuzzy Monkey will report the investment at its unamortized cost of
$66,205,000 as shown on the previous slide. The reason for this
is that the security is classified as held-to-maturity.
An alternative computation of the unamortized cost is as follows:
Investment in bonds $80,000,000
Discount on bonds
1/1 value $14,000,000
6/30 amortization (100,000)
12/31 amortization (105,000) (13,795,000)
Unamortized cost $66,205,000
Notice that the fair value of $70 million is ignored here.

© Dr. Chula King

All Rights Reserved