Tanner-UNF Corporation acquired as a long-term investment $240 million of 7% bon

Question

Tanner-UNF Corporation acquired as a long-term investment $240 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 $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)investment in bonds ac dr .........240,000,000 discount on bond investment .......40,000,000 cash ......200,000,000 2)cash (3%of 240m) ........ 72,000,000 discount on bonds .......... 800,000 interest revenue (4% 200M) ...... 80,000,000 3)Because management has the positive intent and ability to hold the bonds until maturity, the securities would be classified as held-to-maturity. Therefore, they will be reported at their unamortized cost or book value. Investment in Bonds 240,000,000    Discount on Bonds:    Original Discount 40,000,000 12/31/18Amortization   (800,000) 39,200,000   book value 200,800,000 part 4)   Cash 190,000,000 Discount on Bonds 39,200,000 Loss on Sale 10,800,000 Investment in Bonds 240,000,000  

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