Tanner-UNF Corporation acquired as an investment $260 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 paid $220 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 $230 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 $200 million. Prepare the
journal entries required on the date of sale.
Solution 1 and 2:
Journal Entries - Tanner - UNF Corporation | ||||
Event | Date | Particulars | Debit (In Million) | Credit (In Million) |
1 | 01-Jul-21 | Investment in Bond Dr | $260.00 | |
To Cash | $220.00 | |||
To Discount on bond investment | $40.00 | |||
(Being investment in bond recorded) | ||||
2 | 31-Dec-21 | Cash Dr ($260 * 6% * 6/12) | $7.80 | |
Discount on bond investment Dr | $1.00 | |||
To Interest revenue ($220*10%*6/12) | $8.80 | |||
(Being revenue recoginition for bond interest and discount amortized) |
SOlution 3:
1 | 31-Dec-21 | Fair value adjustment Dr ($230 - $220 - $1.00) | $9.00 | |
To Unrealized holding gain or loss | $9.00 | |||
(Being adjusting entry to record investment at fair value) |
Solution 4:
Journal Entries - Tanner UNF Corportation | ||||
Event | Date | Particulars | Debit (In Million) | Credit (In Million) |
1 | 02-Jan-22 | Unrealized holding gain or loss Dr (230-200) | $30.00 | |
To Fair value adjustment | $30.00 | |||
(To record fair value adjustment) | ||||
2 | 02-Jan-22 | Cash Dr | $200.00 | |
Discount on bond investment Dr ($40-$1) | $39.00 | |||
Fair Value adjustment Dr | $21.00 | |||
To Investment in Bond | $260.00 | |||
(To record sale of investment) |
for part 4 journal entry 1) unrealized holding gain or loss, is loss on investment (unrealized, NI)
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