Question

Exercise 12-1 (Algo) Securities held-to-maturity; bond investment; effective interest, discount (LO12-1] Tanner-UNF Corporation acquired as a long-term investment $190 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 $160.0 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 $170.0 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 $140.0 million. Prepare the journal entry to record the sale.

Answer 1

Solution Particulars Debit Gredit Ivestment in bond 190 discount on bond Investment 100-160] cash - 2 Journal entries to record the Interest at effective Market rate! particular Debit Gredet Cash [8 % X6/12 x 190] Discount on bond 0.4 Interest revenue 10% X 6/12X560] Investment al in the balance sheet particular Amount Amount Investment in bonde 190 Less: descount on bonds original - descount Less: amortization for the year ended 2021 dec 31 Cost of Investment 0.4 29.6 160.4

- 4 Tournal entries on sale of Investment en particulars Debet Gedet 140 004 Cash Discount on debtor Loss on sale of Investment bonds { 310 - 140-0-4) Investment in bonds 169.6 310