Question

Tanner-UNF Corporation acquired as a long-term investment $235 million of 8% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 10% 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. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was $215 million.

Required:
1. & 2. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate.

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

Record interest on December 31, 2021.
3. Prepare any additional journal entry necessary for Tanner-UNF to report its investment in the December 31, 2021, balance sheet.

Record the entry for fair value adjustment.

4. 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 $180 million. Prepare the journal entries necessary to record the sale, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale.

Record the entry for fair-value adjustment, AFS investment.

Record the entry for reclassification adjustment.

Record the sale of the investment by Tanner-UNF.

Answer 1

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Solution: Ignore the explanation line in blue while putting answer in the question format if not require: Treated as AFS Securities: Naming convention is not available, can be slightly different: Journal entries Credit Date Jul.01 2021 Debit $ 235.0 1) $ $ 35.0 200.0 2) Dec.31 2021 Account title and explaination Investment in Bonds Discount on bonds Investment (235-200) Cash (To record the investment in bonds) Cash (235*4%) Discount on bonds Investment (plug) Interest Revenue (200*5%) (To record the interest revenue) Fair value Adjustment (215)- (200+0.6) Unrealized holding Gain - OCI (To record the fair value adjustment) $ 0.6 $ 10.0 3) $ 14.4 Dec.31 2021 $ 14.4

$ . Date Jan.02 2022 14.4 $ 35.0 (14.4+20.60) $ 20.60 (235-34.4)-180 Debit Credit 35.0 I $ 35.0 $ Account title and explaination Unrealized Holding Loss - OCI Fair value adjustment (14.4+20.60) (To record the fair value adjustment) 2) Credit Date Jan.02 2022 Debit 20.6 $ Account title and explaination Fair value adjustment Reclassification Adjustement - OCI (To Record the entry for reclassification adjustment) $ 20.6 3) Credit Date Jan.02 2022 Account title and explaination Cash Discount on Bonds Investment Loss - NI Investment in Bonds (To record the sale of investment) $ $ $ Debit 180.0 34.4 20.6 $ 235.0