Tanner-UNF Corporation acquired as a long-term investment $360
million of 8.0% 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 10% for bonds
of similar risk and maturity. Tanner-UNF paid $330.0 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 $340.0
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.
Record Tanner-UNF’s investment in the bonds on July 1, 2021.
Record interest on December 31, 2021.
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 $320.0 million. Prepare the
journal entry to record the sale.
Prepare any journal entry needed to adjust the investment to fair value.
Record the 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 | $360.00 | |
| To Cash | $330.00 | |||
| To Discount on bond investment | $30.00 | |||
| (Being investment in bond recorded) | ||||
| 2 | 31-Dec-21 | Cash Dr ($360 * 8% * 6/12) | $14.40 | |
| Discount on bond investment Dr | $2.10 | |||
| To Interest revenue ($330*10%*6/12) | $16.50 | |||
| (Being revenue recoginition for bond interest and discount amortized) | ||||
Solution 3:
Investment to be reported = $330 million + $2.10 millions = $332.10 millions
Solution 4:
No, journal entry needed to adjust the investment to fair value.
Entry to record sale is as under:
| Journal Entries - Tanner UNF Corportation | ||||
| Event | Date | Particulars | Debit (In Million) | Credit (In Million) |
| 1 | 02-Jan-22 | Cash Dr | $320.00 | |
| Discount on bond investment Dr ($30-$2.10) | $27.90 | |||
| Loss on sale of investment Dr | $12.10 | |||
| To Investment in Bond | $360.00 | |||
| (To record sale of investment) | ||||
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