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Mills Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2018. Company management is holding the bonds
Mills Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2018.
Company management is holding the bonds in its trading portfolio.
The market interest rate (yield) was 4% 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, 2018, was $270 million.
Required:
- Prepare the journal entry to record Mills' investment in the bonds on July 1, 2018
- Prepare the journal entries by Mills to record interest on December 31, 2018, at the effective (market) rate.
- At what amount will Mills report its investment in the December 31, 2018, balance sheet? Why?
- Suppose Moody's bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2019, for $290 million. Prepare the journal entry to record the sale.
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