Chapter 12, Problem 12.6E

Trading securities

• LO12-1

[This is a variation of E 12–2 focusing on trading securities.]

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:

1. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2018.

2. Prepare the journal entries by Mills to record interest on December 31, 2018, at the effective (market) rate.

3. At what amount will Mills report its investment in the December 31, 2018, balance sheet? Why?

4. 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.