Question

Tanner-UNF Corporation acquired as a long-term investment $245 million of 8% bonds, dated July 1, on July 1, 2018. 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. Company management has classified the bonds as available-for-sale investments. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $205 million. Required: 1. & 2. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate. 3. Prepare any additional journal entry necessary for Tanner-UNF to report its investment in the December 31, 2018, 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, 2019, 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.

Answer 1

Answer:-

Answer 1 & 2.
Journal Entry
Date	Particulars	Dr. Amt.	Cr. Amt.
1-Jul-18	Investment in Bonds	245.00
	Cash		200.00
	Discount on Bonds		45.00
	(record the purchase of bonds)
31-Dec-18	Cash	9.80		$245 X 8% X 6/12
	Discount on Bonds	0.20
	Interest Revenue		10.00	$200 X 10% X 6/12
	(Record the interest received)
Answer 3.
Journal Entry
Date	Particulars	Dr. Amt.	Cr. Amt.
31-Dec-18	Fair Value Adjustment	4.80		$205 - ($200 + $0.20)
	Net Unrealized Holding Gains & Losses - I/S		4.80
	(record the fair value adjustment)
Answer 4.
Journal Entry
Date	Particulars	Dr. Amt.	Cr. Amt.
2-Jan-19	Cash	180.00
	Discount on Bonds	44.80		$45 - $0.20
	Loss on Sale of Bonds	20.20
	Investment in Bonds		245.00
	(Record the sale of Bonds)
2-Jan-19	Net Unrealized Holding Gains & Losses - I/S	4.80
	Fair Value Adjustment		4.80

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