Tanner-UNF Corporation acquired as an investment $300 million of
7% 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 paid $280 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 $285 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 $260 million. Prepare the
journal entries required on the date of sale.
Journal Entry 4a
Journal Entry 4b
| Date | Particulars | Debit | Credit | |
| Part 1 and 2 | ||||
| July 1 2021 | Investment | 300 | ||
| Discount on bonds | 20 | |||
| Cash | 280 | |||
| ( Being bonds purchased) | ||||
| Dec 31 2021 | Cash | 10.5 | ||
| Bond Discount | 0.9 | |||
| Interest Income | 11.4 | |||
| ( being interest income recognised) | ||||
| Part 3 | ||||
| Dec 31 2021 | Fair value adjustments | 19.1 | (20-.9) | |
| Investment | 19.1 | |||
| ( being investment adjusted for fair value) | ||||
| Part 4 | ||||
| Jan 2 2022 | Cash | 260 | ||
| Discount | 19.1 | |||
| Loss on sale | 20.9 | |||
| Investment | 300 | |||
| ( Being investment sold) | ||||
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