Tanner-UNF Corporation acquired as a long-term investment $310 million of 6.0% b
ID: 2328527 • Letter: T
Question
Tanner-UNF Corporation acquired as a long-term investment $310 million of 6.0% bonds, dated July 1, on July 1, 2018. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 9% for bonds of similar risk and maturity. Tanner-UNF paid $280.0 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 $290.0 million.
Required:
1. & 2. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.
3. At what amount will Tanner-UNF report its investment in the December 31, 2018, balance sheet?
4. Suppose Moody’s bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2019, for $270.0 million. Prepare the journal entry to record the sale.
Explanation / Answer
Answer
1. & 2.
(In Million)
Date
Particulars
Dr. $
Cr. $
1-Jul-18
Investment- Bonds
310.00
Discount on Investment- Bonds (Bal.)
30.00
Cash
280.00
(Being investment done recorded)
31-Dec-18
Cash ($310 Million * 6% * 6/12 Months)
9.30
Discount on Investment- Bonds (Bal.)
3.30
Interest Revenue ($280 Million * 9% * 6/12 Months)
12.60
(Being Interest revenue recorded)
3.
Investment Value = Investment Cost + Interest Revenue - Discount on Investment- Bonds written off on 31 Dec, 2018
= $280 + 12.6 – 3.3
Investment Value = $289.3
4.
Date
Particulars
Dr. $
Cr. $
2-Jan-19
Cash
270.00
Discount on Investment- Bonds (30 - 3.3)
26.70
Loss on Sale (Bal.)
13.30
Investment in Bonds
310.00
(Being Investment sold at loss)
Dear Student, if u have any doubt, plz feel free to reach me.
(In Million)
Date
Particulars
Dr. $
Cr. $
1-Jul-18
Investment- Bonds
310.00
Discount on Investment- Bonds (Bal.)
30.00
Cash
280.00
(Being investment done recorded)
31-Dec-18
Cash ($310 Million * 6% * 6/12 Months)
9.30
Discount on Investment- Bonds (Bal.)
3.30
Interest Revenue ($280 Million * 9% * 6/12 Months)
12.60
(Being Interest revenue recorded)
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