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

Solution:

1. Investment in bonds ...........................260

Discount on bonds ................................40

Cash .....................................................220

2. Cash ..............................................8

Discount on bond investment ............2

Interest Revenue ........................ 10

3. Investment = 220 + 2 = $222 million

4. Cash................................................170

Dicount on bond investment...............78

Loss on sale of investment.................12

Investment bonds .................................260

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