Tanner-UNF Corporation acquired as a long-term investment $260 million of 5% bon

Question

Tanner-UNF Corporation acquired as a long-term investment $260 million of 5% bonds, dated July 1, on July 1, 2018, The market : interest rate (yield) was 7% for bonds of similar risk and maturity. Tanner-UNF paid $200 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 $215 million Required: 1.&2.Prepare the journal entry to record Tanner-UNFs 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 $190 million. Prepare the journal entries necessary to record the sale, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale. Complete this question by entering your answers in the tabs below. Req 1 and 2Req 3 Req 4 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).) View transaction list

Explanation / Answer

Tanner-UNF Corp

Date

Account Titles and Explanation

Ref. No.

Debit (amount in Millions)

Credit (amount in Millions)

1-Jul

Investment in Bonds

$260

Discount on Bond Investment

$60

Cash

$200

(To record investment in bonds)

Date

Account Titles and Explanation

Ref. No.

Debit (Amt. in Millions)

Credit (Amt. in Millions)

31-Dec

Cash

$6.5

Discount on Bond Investment

$0.5

Interest Revenue

$7

(To record semi-annual interest received on bonds, amortization of discount of bonds and interest revenue)

Note: semi-annual interest received = $260 M x 5% x 6/12 months

Hence, cash interest received = $260 x 2.5% = $6.5 Million

Interest revenue = $200 M x 7% x 6/12 months

Semi-annual interest revenue = $200 M x 3.5% = $7 Million

Discount bond Investment amortization = interest revenue – cash received

= $7 M - $6.5 M = $0.5M

Date

Account Titles and Explanation

Ref. No.

Debit (Amt. in Millions)

Credit (Amt. in Millions)

31-Dec

Fair value adjustment

$14.5

Unrealized Holding Gain

$14.5

Fair value adjustment is calculated as follows,

fair market value

$215 M

Book value

$260 M

Less: discount on bonds

$59.5 M

($60 M - $0.5 M)

$200.5 M

Increase in value

$14.5M

Date

Account Titles and Explanation

Ref.No

Debit (Amt. in Millions)

Credit (Amt. in Millions)

2-Jan-19

Cash

$190

Fair value adjustment

$10.50

Discount on bond investment

$59.50

Investment in bonds

$260

(to record the sale of investments)

Fair value $190 M

Book value $200.5 M

Decrease in value $10.5 M

Date

Account Titles and Explanation

Ref. No.

Debit (amount in Millions)

Credit (amount in Millions)

1-Jul

Investment in Bonds

$260

Discount on Bond Investment

$60

Cash

$200

(To record investment in bonds)

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