Tanner-UNF Co acquired as a long-term invesment $240 million of 6% bonds, dated

Question

Tanner-UNF Co acquired as a long-term invesment $240 million of 6% bonds, dated July 1, on July 1, 2013. Company Management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 8% for bonds of similar risk and matury. Tanner-UNF paid $200 million for the bonds. The company will receive interest semiannually on June 30 and Dec 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2013 was $210 million. Required: 1) Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2013. 2) Prepare the journal entry by Tanner-UNF to record interest on December 31, 2013, at the effective market rate 3) At what amount will Tanner-UNF report its investment in the Dec 31, 2013 balance sheet? Why? 4) Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on Jan 2, 2014 for $190 million. Prepare the journal entry to record the sale. Thank you for help.

Explanation / Answer

(1)
DR Investment 240,000 CR Bond Discount 40,000 CR Cash 200,000

(2)
DR Cash 7,200 (Face amount x Face rate for 6 mos)
DR Bond Discount 800
CR Interest Income 8,000 (Carrying Value x Market rate when issued, for 6 mos)

(3)
At Carrying Value of 200,800 (240,000 - 40,000 + 800)

(4)
DR Cash 190,000 DR Discount 39,200 Loss on sale 10,800
CR Investment 240,000

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