Question

Question 1: Tanner-UNF Corporation acquired as an investment $245 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 $205 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

Question 2:

Rantzow-Lear Company buys and sells debt securities expecting to earn profits on short-term differences in price, and holds these investments in its trading portfolio. The company’s fiscal year ends on December 31. The following selected transactions relating to Rantzow-Lear’s trading account occurred during December 2021 and the first week of 2022.

2021
Dec.		17		Purchased 135 Grocers’ Supply Corporation bonds at par for $607,500.
		28		Received interest of $3,400 from the Grocers’ Supply Corporation bonds.
		31		Recorded any necessary adjusting entry relating to the Grocers’ Supply Corporation bonds. The market price of the bond was $5,000 per bond.
2022
Jan.		5		Sold the Grocers' Supply Corporation bonds for $641,250.

Required:
1. Prepare the appropriate journal entry or entries for each transaction.
2. Indicate any amounts that Rantzow-Lear Company would report in its 2021 balance sheet and income statement as a result of this investment.

Answer 1

Question - (1)

(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.

Answer -

Date	General Journal	Debit ($ in million)	Credit ($ in million)
July 1, 2021	Investment in Bonds Discount on Bond Investment [Difference] Cash (To record investment in the bonds)	$245 - -	- $45 $200
December 31, 2021	Cash [($245 million * 8%) / 2] Discount on Bonds [Difference] Interest Revenue [($200 million * 10%) / 2] (To record Interest Revenue)	$9.8 $0.2 -	- - $10

.

(3) -- Prepare any additional journal entry necessary for Tanner-UNF to report its investment in the December 31, 2021, balance sheet.

Answer -

Date	General Journal	Debit ($ in million)	Credit ($ in million)
December 31, 2021	Fair value adjustment [working Note - (1)] Unrealized holding gain	$4.8 -	- $4.8

# Working Note - (1) -

	Particulars	Calculation	Amount ($ in million)
I.	Fair value of the bonds at December 31, 2021	Given in question	$205
II.	Book value (Less Discount)	$245 million - ($45 million - $0.2 million)	$200.2
Increase in value		I - II	$4.8

.

(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.

Answer -

Date	General Journal	Debit ($ in million)	Credit ($ in million)
January 2, 2022	Cash Fair value adjustment [Difference] Discount on bond Investment [$45 million - $0.2 million] Investment in Bonds	$180 $20.2 $44.8 -	- - - $245