Tanner-UNF Corporation acquired as a long-term investment $200 million of 7% bon

Question

Tanner-UNF Corporation acquired as a long-term investment $200 million of 7% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 9% for bonds of similar risk and maturity. Tanner-UNF paid $160 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 $170 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 $150 million. Prepare the journal entries to record the sale.

Explanation / Answer

1 & 2) Journal entries to record investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate is shown as follows:-

  Journal Entries (Amount in million $)

3) Journal entry to report its investment in the December 31, 2018, balance sheet.

Journal Entries (Amount in million $)

4) Journal Entries to record the sale (Amount in million $)

Date General Journal Debit Credit Julu 1, 2018 Investment in Bonds 200 Discount on bond investment (200-160) 40 Cash 160 (To record the investment in bonds) Dec. 31, 2018 Cash (200 million*7%*6/12) 7.0 Discount on bond investment (7.2-7.0) 0.2 Interest Revenue (160 million*9%*6/12) 7.2 (To record the interest revenue)

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