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Tanner-UNF Corporation acquired as an investment $240 million of 6% bonds, dated July 1, on July 1, 2021.


Tanner-UNF Corporation acquired as an investment $240 million of 6% bonds, dated July 1, on July 1, 2021. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF pald $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 $210 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.

 3. Prepare any additional Journal entry necessary for Tanner-UNF to report its investment in the December 31, 2021, 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, 2022, for $190 million. Prepare the journal entries required on the date of sale.

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Answer #1

Ans 1

Investment in Bond
Date General Journal Debit Credit
01-07-2021 Investment in 6% Coupon Bond 200
Cash 200

Explanation

The investment in bond is held as a trading portfolio and will classified as Fair value through P&L and requires recognition of the change in the fair value in P&L

Ans 2

Recording of Interest Income
Date General Journal Debit Credit
31-12-2021 Cash 7.2
Interest Income 7.2

Explanation

Bond Par value * Semi annual Coupon Rate   240 MN * 6% /2= 7.2 MN

Ans 3

Fair Valuation as on Balance Sheet Date
Date General Journal Debit Credit
31-12-2021 Fair Value Adjustment on Investment in Bond [ P&L]                       10.00
Investment in 6% Coupon Bond                     10.00

Explanation

Market Value of the Bond as on July 1 2021                     200.00
Market Value of the Bond as on Dec 31 2021                     210.00
Fair Value through P&L [ Gain or Loss]                       10.00

Ans 4

Sale of Bond on Jan 2 2022
Date General Journal Debit Credit
02-01-2022 Profit Or Sale on Investment in 6% Coupon Bond 20
Investment in 6% Coupon Bond 20

Explanation

Market Value of the Bond as on Dec 31 2021                     210.00
Market Value of the Bond as on Jan 2 2022                     190.00
Profit Or Sale on Investment in 6% Coupon Bond                     -20.00
2 4
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