Question

Tanner-UNF Corporation acquired as a long-term investment $340 million of 6% bonds, dated July 1, on July 1, 2021. 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 9% for bonds of similar risk and maturity. Tanner-UNF paid $310 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, 2021, was $320 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, 2021, interest on December 31, 2021, at the effective (market) and fair value changes as of December 31, 2021.

Record Tanner-UNF’s investment in the bonds on July 1, 2021.

Record interest on December 31, 2021, at the effective (market) rate.

Record the entry to recognize fair value changes as of December 31, 2021.

5. At what amount will Tanner-UNF report its investment in the December 31, 2021, 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, 2022, for $300 million. Prepare the journal entries to record the sale.

Record the entry to adjust to fair value on the date of sale.

Record the sale of the bonds on January 2, 2022.

Answer 1

Solution 1:

this investment be classified on Tanner-UNF's balance sheet as "Trading securities".

Solution 2 to 4:

Journal Entries - Tanner - UNF Corporation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	01-Jul-21	Investment in Bond Dr	$340.00
		To Cash		$310.00
		To Discount on bond investment		$30.00
		(Being investment in bond recorded)
2	31-Dec-21	Cash Dr ($340 * 6% * 6/12)	$10.20
		Discount on bond investment Dr	$3.75
		To Interest revenue ($310*9%*6/12)		$13.95
		(Being revenue recoginition for bond interest and discount amortized)
3	31-Dec-21	Fair value adjustment Dr ($320 - $310 - $3.75)	$6.25
		To Unrealized holding gain or loss		$6.25
		(Being adjusting entry to record investment at fair value)

Solution 5:

Tanner-UNF will report its investment in the December 31, 2021, balance sheet = $320 millions

Solution 7:

Journal Entries - Tanner UNF Corportation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	02-Jan-22	Unrealized holding gain or loss Dr (320-300)	$20.00
		To Fair value adjustment		$20.00
		(To record fair value adjustment)
2	02-Jan-22	Cash Dr	$300.00
		Discount on bond investment Dr ($30-$3.75)	$26.25
		Fair Value adjustment Dr	$13.75
		To Investment in Bond		$340.00
		(To record sale of investment)