Question

Tanner-UNF Corporation acquired as an investment $240 million of 8% bonds, dated July 1, on July 1, 2021. Company management is holding the bonds in its trading portfolio. 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 $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 $180 million. Prepare the journal entries required on the date of sale.

a. Prepare any journal entry needed to adjust the investment to fair value.

b. Record the sale of the investment by Tanner-UNF.

Answer 1

1 & 2)
Date	Accounts Title & Descriptions	Debit $'m	Credit $'m
1-Jul-21	Bonds Receivable	240
	Discount on Bonds receivable		40
	Cash		200
	(investment in 8%bonds on discount)
31-Dec-21	Cash	9.6		240*4%
	Discount on Bonds receivable	10		200*5%
	Interest Revenue		19.6
	(interest revenue recorded)
3)
Date	Accounts Title & Descriptions	Debit $'m	Credit $'m
31-Dec-21	Unrealised Loss	30		(240-210)
	Bonds Receivable		30
	(adjustment towards fair value)
4a)
Date	Accounts Title & Descriptions	Debit $'m	Credit $'m
2-Jan-22	Loss on Bonds Receivable	30		(240-210)
	Unrealised Loss		30
	(Unrealised loss transferred to Loss account)
4b)
2-Jan-22	Cash	180
	Discount on Bonds receivable	30
	Bonds Receivable		210
	(sale of bonds at loss due to down rating)