Tanner-UNF Corporation acquired as a long-term investment $290 million of 6% bon

Question

Tanner-UNF Corporation acquired as a long-term investment $290 million of 6% bonds, dated July 1, on July 1, 2018. Company management has the positive intent and ability to hold the bonds until maturity, but when the bonds were acquired Tanner-UNF decided to elect the fair value option for accounting for its investment. The market interest rate (yield) was 7% for bonds of similar risk and maturity. Tanner-UNF paid $260 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 $270 million.

Required:
1. How would this investment be classified on Tanner-UNF's balance sheet?
2. to 4. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2018, interest on December 31, 2018, at the effective rate and fair value changes as of December 31, 2018.
5. At what amount will Tanner-UNF report its investment in the December 31, 2018, balance sheet?
6. 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 $250 million. Prepare the journal entry to record the sale.

Explanation / Answer

1
This investment be classified as Trading Securities on Tanner-UNF's balance sheet. For electing fair value, these securities reclassified as Trading Securities.

2 to 4.

Journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2018

Journal entry to record interest on December 31, 2018, at the effective rate

Journal entry to record fair value changes as of December 31, 2018

5
At $270 million Tanner-UNF report investment in the December 31, 2018, balance sheet
Carring Value + Fair Value Adjustment = $260.40 + 9.60 = $270 million

6
Journal entry to record the sale on January 2, 2019

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