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 has classified the bonds as available-for-sale investments. 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 necessary to record the sale, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale.

Explanation / Answer

Solution:-

1&2:-

3.:-

4:-

Please Rate or comment if you have any doubt regarding this solution.

Event General journal Amount in million Debit Credit 1 Investment in bonds 200 Discount on bond investment 40 Cash 160 2 Cash (200,000,000 * 3.5%) 7 Discount on bonds 0.2 Interest revenue (160,000,000 * 4.5%) 7.2

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