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Prepare the journal entries required on the date of sale

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Mills Corporation acquired as a long-term investment $240 million of 8% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Mills paid $280 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, 2021, was $265 million.

Required:

Question 1: Prepare the journal entry to record Mills' investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate.

Question 2: At what amount will Mills report its investment in the December 31, 2021, balance sheet?

Question 3: Suppose Moody's bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2022, for $292 million. Prepare the journal entries required on the date of sale.

1) record the fair-value adjustment

2) record any reclassification adjustment

3) record the sale of the investment by Mills

Reference no: EM132477224

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