Question

Tanner-UNF Corporation acquired as a long-term investment $280 million of 6.0% bonds, dated July 1, on July 1, 2021. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $250.0 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 $260.0 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. At what amount will Tanner-UNF 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 $240.0 million. Prepare the journal entry to record the sale. 

Answer 1

Solution 1 & 2:
Journal Entries - Tanner UNF
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	1-Jul-21	Investment in Bond Dr	$280.00
		To Cash		$250.00
		To Discount on bond investment		$30.00
		(Being investment in bond recorded)
2	31-Dec-21	Cash Dr ($280 * 6% * 6/12)	$8.40
		Discount on bond investment Dr	$1.60
		To Interest revenue ($250*8%*6/12)		$10.00
		(Being revenue recoginition for bond interest and discount amortized)

Solution 3: Tanner UNF report its investment on 31.12.2021 balance sheet at amortized cost i.e. = $250 + $1.60 = $251.60 million

Solution 4:
Journal Entries - Tanner UNF Corportation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	2-Jan-22	No Journal Entry Required
2	2-Jan-22	Cash Dr	$240.00
		Discount on bond investment Dr	$28.40
		Loss on sale of investment Dr	$11.60
		To Investment in Bond		$280.00
		(To record sale of bonds)