# Mills Corporation Bond Investment Accounting ## 1. Journal Entry to Record Investment on July 1, 2018 Mills purchases $260 million face value of 7% bonds for **$320 million** (premium, since market rate is 5%). The bonds are classified as **available-for-sale**. **Journal Entry:** | Date | Account | Debit ($ millions) | Credit ($ millions) | |------------|-----------------------------|--------------------|---------------------| | 2018-07-01 | Investment in Bonds (AFS) | 320 | | | | Cash | | 320 | **Explanation:** Investment recorded at purchase price. --- ## 2. Journal Entry for Interest on December 31, 2018 ### Step 1: Calculate Interest Received - **Face Value:** $260 million - **Stated Rate:** 7% per year, paid semiannually - **Interest Payment (for 6 months):** \( = \$260 \text{ million} \times 7\% \times \frac{6}{12} = \$9.1 \text{ million} \) ### Step 2: Calculate Interest Revenue (Effective Interest) - **Carrying Value at 7/1/18:** $320 million - **Market Rate:** 5% per year, or 2.5% per 6 months - **Interest Revenue (for 6 months):** \( = \$320 \text{ million} \times 2.5\% = \$8 \text{ million} \) ### Step 3: Amortization of Premium - **Premium Amortization:** \( = \text{Cash Received} - \text{Interest Revenue} = \$9.1 \text{ million} - \$8 \text{ million} = \$1.1 \text{ million} \) ### Step 4: Journal Entry | Date | Account | Debit ($ millions) | Credit ($ millions) | |------------|-----------------------------------|--------------------|---------------------| | 2018-12-31 | Cash | 9.1 | | | | Investment in Bonds (AFS) | 1.1 | | | | Interest Revenue | | 8 | | | (To record semiannual interest at effective rate) | | | --- ## 3. Carrying Value on December 31, 2018 Balance Sheet - **Initial Carrying Value (July 1):** $320 million - **Less: Amortized Premium (to Dec 31):** $1.1 million - **New Carrying Value:** \( \$320 \text{ million} - \$1.1 \text{ million} = \$318.9 \text{ million} \) - **Fair Value (given):** $300 million ### Balance Sheet Presentation - **Investments (Available-for-sale, at fair value):** $300 million - **Unrealized Loss (OCI):** \( \$318.9 \text{ million} - \$300 \text{ million} = \$18.9 \text{ million} \) (reported in Accumulated Other Comprehensive Income) --- ## 4. Journal Entry for Sale on January 2, 2019 ### Step 1: Record Sale Proceeds - **Sale Price:** $330 million - **Carrying Value (from above):** $318.9 million ### Step 2: Remove Investment and Realize Gain - **Previously Recognized Unrealized Loss:** $18.9 million in OCI - On sale, reclassify this amount to net income. ### Journal Entries #### (a) Remove investment at carrying value and record cash received | Date | Account | Debit ($ millions) | Credit ($ millions) | |------------|-----------------------------------|--------------------|---------------------| | 2019-01-02 | Cash | 330 | | | | Investment in Bonds (AFS) | | 318.9 | | | Gain on Sale of Investments | | 11.1 | #### (b) Reclassify unrealized loss from OCI to net income | Date | Account | Debit ($ millions) | Credit ($ millions) | |------------|------------------------------------------|--------------------|---------------------| | 2019-01-02 | Accumulated Other Comprehensive Income | 18.9 | | | | Gain on Sale of Investments | | 18.9 | **Net gain recognized in income:** - From sale: $11.1 million - From OCI reclassification: $18.9 million - **Total gain**: $30 million --- # Summary Table | Step | Description | Amount ($ millions) | |------|-------------------------------------------|------------------------------| | 1 | Initial investment (cash paid) | 320 | | 2 | Interest revenue (effective) | 8 | | 2 | Cash interest received | 9.1 | | 2 | Premium amortized | 1.1 | | 3 | Carrying value (12/31/2018) | 318.9 | | 3 | Fair value (12/31/2018) | 300 | | 3 | Unrealized loss in OCI | 18.9 | | 4 | Sale proceeds (1/2/2019) | 330 | | 4 | Gain on sale (income statement) | 30 (11.1 + 18.9) | --- ## Final Answers (Concise) 1. **July 1, 2018 entry:** - Debit Investment in Bonds (AFS) $320 million - Credit Cash $320 million 2. **Dec 31, 2018 entry:** - Debit Cash $9.1 million - Debit Investment in Bonds (AFS) $1.1 million - Credit Interest Revenue $8 million 3. **Balance Sheet value at Dec 31, 2018:** - Investment (AFS) at fair value: $300 million - Unrealized loss ($18.9 million) in OCI 4. **Entries on sale at $330 million (Jan 2, 2019):** - Debit Cash $330 million - Credit Investment in Bonds (AFS) $318.9 million - Credit Gain on Sale of Investments $11.1 million - Reclassify $18.9 million from OCI to net income (Gain on Sale of Investments)

# Calculation of Gain on Sale of Investments To determine the gain on the sale of the investments, we need to follow a few clear steps: ## 1. Determine Sale Proceeds - **Sale Price:** $330 million ## 2. Determine Carrying Value at Sale - The carrying value of the investment at the time of sale was calculated as: - **Initial Cost:** $320 million (Purchase Price) - **Less: Amortization of Premium:** $1.1 million - **Carrying Value:** \( \$320 \text{ million} - \$1.1 \text{ million} = \$318.9 \text{ million} \) ## 3. Calculate Gain on Sale ### Formula for Gain on Sale: \[ \text{Gain on Sale} = \text{Sale Proceeds} - \text{Carrying Value} \] ### Substituting the Values: \[ \text{Gain on Sale} = \$330 \text{ million} - \$318.9 \text{ million} = \$11.1 \text{ million} \] ## Summary of Calculation - **Sale Proceeds:** $330 million - **Carrying Value:** $318.9 million - **Gain on Sale:** $11.1 million This gain is recorded in the financial statements as part of the income for the period.