Tanner-UNF Corporation acquired as a long-term investment $270 million of 8% bon

Question

Tanner-UNF Corporation acquired as a long-term investment $270 million of 8% bonds, dated July 1, on July 1, 2013. 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 10% for bonds of similar risk and maturity. Tanner-UNF paid $240 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, 2013, was $250 million.

Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2013. (If no entry is required for a particular event, select "No journal entry required" in the first account field. Enter your answers in millions, (i.e., 10,000,000 should be entered as 10).)

3. Prepare the journal entry used by Tanner-UNF to record interest on December 31, 2013, at the effective (market) rate

Prepare any journal entry necessary to recognize fair value changes as of December 31, 2013. (If no entry is required for an 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, 2013, balance sheet? (Do not round your intermediate calculations. Enter your answer in millions.)

Prepare the 2014 adjusting journal entry assuming that Tanner-UNF has no other securities in this category. Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2014, for $230 million. (If no entry is required for a particular 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

1)

The investment would be treated as held to maturity because it is a long term investment.

2)

July 1)

Bonds account debit 270,000,000

To cash account 270,000,000

( for cash invested in bonds)

dec 31)

Cash account debit 13,500,000

To interest 13,500,000

( For interest racecived at market rate of 5%)

4) No adjustments are reuired as this is the investment held to maturity

5)

Investment would be recorded at intial investment plus the interest received

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