Tanner-UNF Corporation acquired as a long-term investment $250 million of 6% bon

Question

Tanner-UNF Corporation acquired as a long-term investment $250 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.

Record Tanner-UNF’s investment in the bonds on July 1, 2018.

Record interest on December 31, 2018.

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.

Record the entry to adjust the fair value.

Record the sale of the investment by Tanner-UNF.

Explanation / Answer

1.

Investment in bonds $250M

Discount on Bond investment $50M

Cash $200M

2.

Cash (250M*6%*6/12) $7.5M

Discount on bond investment $0.5M

Interest Revenue (200M*8%*6/12) $8M

3.

Fair value adjustment $9.5M

Net unrealised holding gains and losses $9.5M

Working:

Investment in bonds = $250M

Discount on bonds Less amortizations = 50M - 0.5M = 49.5M

Book value of bonds = $200.5M

Fair value = $210

Adjustment = 210 - 200.5 = $9.5M

4.

Net unrealised holding gains and losses $9.5M

Fair value adjustment $9.5M

Cash $190M

Discount on bonds $49.5M

Loss on sale $10.5M

Investment in bonds $250M

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