Tanner-UNF Corporation acquired as a long-term investment $200 million of 6% bon

Question

Tanner-UNF Corporation acquired as a long-term investment $200 million of 6% bonds, dated July 1, on July 1, 2016. Company management has the positive intent and ability to hold the bonds until maturity, but when the bonds were acquired Tanner-UNF decided to elect the fair value option for accounting for its investment. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $170 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, 2016, was $180 million.

Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2016, interest on December 31, 2016, at the effective rate and fair value changes as of December 31, 2016. (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).)

At what amount will Tanner-UNF report its investment in the December 31, 2016, balance sheet?

Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2017, for $150 million. Prepare the journal entry to record the sale. (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).)

At what amount will Tanner-UNF report its investment in the December 31, 2016, balance sheet?

Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2017, for $150 million. Prepare the journal entry to record the sale. (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).)

Explanation / Answer

Amt in Mill $ Amt in Mill $ Bond Purchase 01-Jul Investment in Bond A/C dr 170 To Cash A/C 170 30 Interest Received 31st Dec Cash A/ dr. 6 To Interest income 6 Bond record on market value 31st Dec Investment in Bond 10 To Profit on recorded fair value 10 Bond will be recorded on $ 180 mill on 31st Dec On sale 02-Jan Cash A/C dr. 150 Loss on sale of bond 30 To Investment bond 180

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