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.

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

1) Date Account Title and Explanation Debit Credit July 01,2018 Investment in Bonds         25,00,00,000          Discount on Bonds           5,00,00,000          Cash         20,00,00,000 To record the purchase of Bonds in discount 2) Date Account Title and Explanation Debit Credit Dec 31,2018 Cash               75,00,000 Discount on Bonds                 5,00,000           Interest Revenue               80,00,000 To record the Interest Revenue Calculate the Cash Received. Interest Received = Face value * Stated interest rate * Semi annual Time period Interest Received = $250,000,000 * 6/100 * 6/12 = $75,00,000 Calcuation of Interest Revenue. Interest Revenue = Outstanding Balance on Bonds * Effective Interest rate * Sami annual Time period Interest Revenue = $200,000,000 *8/100 *6/12 = $80,00,000 3) Fair value given at the end of 31st Dec 2018 = $210,000,000 Fair value as per books = $200,000,000+$500,000 = $200,500,000 Difference amount to be adjusted = 210,000,000 - 200,500,000 = 95,00,000. Date Account Title and Explanation Debit Credit Dec 31,2018 Fair Value Adjustment               95,00,000              Net Unreaslised Holdings(Gair or loss)               95,00,000 To record the Adjustment of trading securities to fair market value 4) Date Account Title and Explanation Debit Credit Jan 02,2019 Cash         19,00,00,000 Discount on Bonds (500 -5)           4,95,00,000 Loss on Sale of Investments           1,05,00,000               Investment in Bonds         25,00,00,000 To record the Sale of Bonds

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