Tanner-UNF Corporation acquired as a long-term investment $260 million of 8% bon

Question

Tanner-UNF Corporation acquired as a long-term investment $260 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 $220 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 $230 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 $170 million. Prepare the journal entries to record the sale.

Explanation / Answer

Answer

Journal Entry:

Calculation For adjustment:

Carrying value of bond = 260 - (40-0.20) =220.20

Adjustment to be made to fair value =$230-220.20 =10.20

Date Particulars Dr(in million) Cr(in million) July 1, 2018 Investment in bonds $260 Discount on bond investment $40 Cash $220 December 31, 2018 Cash ($260*8%*6/12) $10.40 Discount on bonds(11-10.40) $0.20 Interest revenue(220*10%*6/12) $11 December 31, 2018 Fair value adjustment (W.N.) $10.20 Unrealized holding gain and loss $10.20 January 2, 2019 Cash $170 Discount on bonds(40-0.20) $39.20 loss on sale of investment in bonds $50.80 investment in bonds $260

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