Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bon

Question

Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 8% 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 is holding the bonds in its trading portfolio. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $210 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 $190 million. Prepare the journal entries to record the sale.

Explanation / Answer

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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