Tanner-UNF Corporation acquired as a long-term investment $220 million of 4.0% b

Question

Tanner-UNF Corporation acquired as a long-term investment $220 million of 4.0% 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 6% for bonds of similar risk and maturity. Tanner-UNF paid $180.0 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 $190.0 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 $160.0 million. Prepare the journal entry to record the sale.

Explanation / Answer

Date General Journal Debit Credit July 1, 2018 Investment in Bonds 220 Discount on Bond Investment 40 Cash 180 2 Cash 220*2% 4.4 Discount on bonds 1 Interest Revenue 180*3% 5.4 3 Fair market value 190 Book value 220 Less: Discount(40-1) 39 181 Increase in value 9 Fair value adjustment 9 Unrealized holding gain 9 4 Fair value 160 Book value 181 Decrease in value -21 Unrealized holding loss 21 Fair value adjustment 21 Cash 160 Less:Fair value adjustment 21 Less:Discount on bond investment 39 Investment in bonds 220

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