Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $190 million of 8% bonds, dated January 1, on January 1, 2013. Management intends to have the investment available for sale when circumstances warrant. When the company purchased the bonds, management elected to account for them under the fair value option. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $169 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, 2013, was $180 million.
a) Prepare the journal entry to record Fuzzy Monkey's investment on January 1, 2013.
b) Prepare the journal entry by Fuzzy Monkey to record interest on June 30, 2013 (at the effective rate).
c) Prepare the journal entries by Fuzzy Monkey to record interest on December 31, 2013 (at the effective rate).
d) At what amount will Fuzzy Monkey report its investment in the December 31, 2013, balance sheet?
e) Prepare a journal entry necessary to record the fair value adjustment.
f) How would Fuzzy Monkey's 2013 statement of cash flows be affected by this investment assuming Fuzzy prepares a direct method statement of cash flows?