HW_11 - Problem 12-4 Note: Because Fuzzy Monkey elected the...

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Unformatted text preview: Problem 12-4 Note: Because Fuzzy Monkey elected the fair value option, these investments will be reclassified as trading securities and accounted for under that approach. Therefore, the answers to Requirements 1-5 are the same as those to Problem 12- 2. Requirement 1 ($ in millions) Investment in bonds (face amount)........................ 80 Discount on bond investment (difference)......... 14 Cash (price of bonds) ......................................... 66 Requirement 2 Cash (4% x $80 million) ........................................ 3.20 Discount on bond investment (difference) ............ .10 Interest revenue (5% x $66) .................................... 3.30 Requirement 3 Cash (4% x $80 million) ........................................ 3.20 Discount on bond investment (difference) ............ .11 Interest revenue (5% x [$66 + 0.1]) ........................ 3.31 Requirement 4 Fuzzy Monkey reports its investment in the December 31, 2011, balance sheet at its fair value, $70 million in this case. For investments in trading securities, changes in market values, and thus market returns, provide an indication of managements success in deciding when to acquire the investment, when to sell it, whether to invest in fixed-rate or variable-rate securities, and whether to invest in long-term or short-term securities. To determine the journal entry that Fuzzy Monkey must make, we first need to determine the investments amortized cost (or book value) at the end of the year: Investment in bonds .......................................................... $80.00 Less: Discount on bond investment ($14 .10 .11 million) 13.79 Amortized cost .............................................................. $66.21 Problem 12-4 (concluded) Then, to record it at fair value, we increase the investment by $70 66.21 = $3.79 million: Fair value adjustment ............................. ........... 3.79 Net unrealized holding gains and lossesI/S ($70 66.21) 3.79 Because these are trading securities, the unrealized holding gain of $3.79 would be recognized in Fuzzy Monkeys 2011 income statement. Requirement 5 Fuzzy Monkeys 2011 statement of cash flows would be affected as follows: Operating cash flows: Cash inflow from interest of $3.2 + $3.2 = $6.4. (Note: if Fuzzy Monkey prepares an indirect method statement of cash flows, it would have included in net income interest revenue of $3.30 + $3.31 = $6.61 and an unrealized holding gain of $3.79, totaling $10.4, so would have to include an adjustment of $6.4 $10.4 = ($4.0) to get from net income to the correct operating cash flow.) from net income to the correct operating cash flow....
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This note was uploaded on 02/10/2011 for the course UGBA 120a taught by Professor Cerf during the Spring '08 term at University of California, Berkeley.

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HW_11 - Problem 12-4 Note: Because Fuzzy Monkey elected the...

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