Tanner-UNF Corporation acquired as a long-term investment $235 million of 8% bon

Question

Tanner-UNF Corporation acquired as a long-term investment $235 million of 8% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 10% 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-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

July 1, 2018 Investment in Bonds 235 Discount on Bond Investment 35 Cash 200 2 Cash 235*8%*6/12 9.4 Discount on bonds 0.6 Interest Revenue 200*5% 10 3 Fair market value 215 Book value 235 Less: Discount(35-0.6) 34.4 200.6 Increase in value 14.4 Fair value adjustment 14.4 Unrealized holding gain 14.4 4 Fair value 180 Book value 200.6 Decrease in value -20.6 Unrealized holding loss 20.6 Fair value adjustment 20.6 Cash 180 Less:Fair value adjustment 20.6 Less:Discount on bond investment 34.4 Investment in bonds 235

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