# Mills Corporation Bond Investment: Step-by-Step Solution ## Problem Overview Mills Corporation acquires $300 million face value bonds at a premium ($340 million) when the market rate is 5%. The bonds pay interest semiannually. The investment is classified as available-for-sale. At year-end, the fair value drops to $320 million, and then the bonds are sold on Jan 2, 2028, for $352 million. ## 1. Journal Entry to Record Bond Investment on July 1, 2027 Mills pays $340 million for bonds with a face value of $300 million. **Journal Entry on July 1, 2027:** - Debit: Investments in Bonds (Available-for-Sale) $340 million - Credit: Cash $340 million ## 2. Journal Entry for Interest on December 31, 2027 (Effective Interest Method) **Step 1: Calculate Semiannual Interest Received** Stated rate (assume 6% annual, since market is 5% and bonds are sold at a premium): Interest payment = $300 million × 6% × (6/12) = $9 million **Step 2: Calculate Interest Revenue Earned (Effective Rate)** Market rate = 5% annual = 2.5% per 6 months Interest revenue = $340 million × 2.5% = $8.5 million **Step 3: Amortization of Premium** Premium amortized = Cash received - Interest revenue = $9 million - $8.5 million = $.5 million **Journal Entry on December 31, 2027:** - Debit: Cash $9 million - Credit: Interest Revenue $8.5 million - Credit: Investment in Bonds $.5 million ## 3. Carrying Amount Reported at December 31, 2027 The investment is reported at fair value for available-for-sale securities. - Fair value at 12/31/2027 = $320 million **On the balance sheet:** Investment in Bonds (AFS) = $320 million Unrealized loss (in OCI) = Carrying value after amortization - Fair value = ($340M - $.5M) - $320M = $339.5M - $320M = $19.5M loss in OCI ## 4. Journal Entries for Sale on January 2, 2028, for $352 Million **Step 1: Update to Fair Value on 12/31/2027** Unrealized loss already recorded in OCI as above. **Step 2: Prepare Sale Entry** - Remove available-for-sale investment at fair value ($320M as of 12/31/2027) - Remove related OCI - Record cash received ($352M) - Recognize realized gain **Journal Entry on January 2, 2028:** - Debit: Cash $352 million - Credit: Investment in Bonds $320 million - Credit: Unrealized Holding Gain—OCI $19.5 million - Credit: Realized Gain on Sale of Investments $12.5 million **Explanation:** The $19.5 million previously recognized in OCI is reversed out of OCI into net income as part of the realized gain. The total realized gain is $352M sale proceeds - $339.5M adjusted carrying amount = $12.5M. ## Final Answers Summary 1. Debit Investments in Bonds $340M, Credit Cash $340M on 7/1/2027. 2. On 12/31/2027, Debit Cash $9M, Credit Interest Revenue $8.5M, Credit Investment in Bonds $.5M. 3. Report investment at $320M (fair value) on 12/31/2027. 4. On 1/2/2028, Debit Cash $352M, Credit Investment in Bonds $320M, Credit Unrealized Holding Gain—OCI $19.5M, Credit Realized Gain on Sale $12.5M.