Tanner-UNF Corporation acquired as a long-term investment $150 million of 4.0% b

Question

Tanner-UNF Corporation acquired as a long-term investment $150 million of 4.0% bonds, dated July 1, on July 1, 2018. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Tanner-UNF paid $120.0 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $130.0 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. At what amount will Tanner-UNF 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 $100.0 million. Prepare the journal entry to record the sale.

Explanation / Answer

1 Investment on bonds 150 discount on bond investment 30 cash 120 2 Cash 3 discount on bond investment 0.6 Interest revenue 3.6 3 Investment 260 million 4 Cash 100 Loss on sale of investment 20.6 discount on bond investment 29.4 Investment on bonds 150 Net unrealized holding gains and losses 3 Fair value adjustment 3

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