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Mills Corporation acquired as an investment $300 million of 7% bonds, dated July 1, on July 1, 2021. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 5% for bonds of similar risk and maturity. Mills paid $340 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 $325 million.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.

Respuesta :

Answer and Explanation:

As per the data given in the question,

Journal entries on July 1 and Dec. 31,2021

July-01    Investment in bonds A/C Dr. $300 million

               Premium on bonds A/c Dr. $40 million

               To Cash  A/c $340 million

Dec-31    Cash A/c Dr. $10.5 million

                        ($300 × 3.5%)

              To Premium on bonds  A/c $2.00 million

              To Interest Revenue A/c $8.5 million

                        ($340 × 2.5%)