Tanner-UNF Corporation acquired as a long-term investment $340 million of 6.0% b

Question

Tanner-UNF Corporation acquired as a long-term investment $340 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 $310.0 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 $320.0 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 $300.0 million. Prepare the journal entry to record the sale.

Explanation / Answer

1) Journal entries Particulars Debit Credit investment in bond 340 discount on bond investment(340-310) 30 cash 310 2) jaurnal entries to record the interest at effective market rate particulars Debit Credit cash (6%*6/12*340) 10.2 discount on bond 3.75 ineterest revenue(9%*6/12*310) 13.95 3) investment a/c in the balance sheet particulars Amount Amount investment in bonds 340 less : discount on bonds- original discount 30 less : amortization for the year ended 2018 dec 31 3.75 26.25 cost of investment 313.75 4) journal entries on sale of investment particulars Debit Credit cash 300 discount on debtor 3.75 loss on sale of inestmement bonds(340-300-3.75) 36.25 investment in bonds 340

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