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 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 $210 million.

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 necessary to record the sale, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale.

a.) Record the entry for FVA adjustment, AFS investment

b.) Record the enry for the reclassification adjustment

c.) Record the sale of the investment by Tanner-UNF

Explanation / Answer

The management wants to hold it as long term investment, but not clear as to whether till maturity, hence appropriate classification is Available for sale.

Journal:

workings:

Ref Date Account Debit Credit a Jul.1 2018 Investment in bonds 200 Cash 200 [Purchased available for sale securities] a Date Account Debit Credit Dec.31 2018 Investment in bonds 10                -   Unrealised holding gain on available for sale securities -OCI                -   10 [ year end fair value adjustment] b No entry as there is no reclassification c Date Account Debit Credit Jan 2. 2019 Bank 190 Investment in bonds 210 Unrealised holding gain on available for sale securities -OCI 10 Realised loss 10 [ available for sale security sold]

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