Tanner-UNF Corporation acquired as a long-term investment $220 million of 6% bon

Question

Tanner-UNF Corporation acquired as a long-term investment $220 million of 6% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $190 million for the bonds. The company will receive interest semiannually on June 30 and December 31. Company management has classified the bonds as available-for-sale investments. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $200 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. Prepare any additional journal entry necessary for Tanner-UNF to 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 $180 million. Prepare the journal entries necessary to record the sale, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale.

Explanation / Answer

1 & 2) Journal entries to record investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate is shown as follows:-

Journal Entries (Amounts in million $)

3) Tanner UNF will report its investment in the December 31, 2018, balance sheet at its fair value i.e. $200 million. The additional required journal entry is shown as follows:-

Journal Entries (Amounts in million $)

4) Journal Entries to record the sale (Amount in million $)

Date General Journal Debit Credit July 1, 2018 Investment in Bonds 220.00 Discount on bond investment (220-190) 30.00 Cash 190.00 (To record the investment in bonds) Dec. 31, 2018 Cash (220 million*6%*6/12) 6.60 Discount on bond investment (7.60-6.60) 1.00 Interest Revenue (190 million*8%*6/12) 7.60 (To record the interest revenue)

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