Question

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Exercise 12-25 (Algo) Fair value option; held-to-maturity Investments (LO12-1, 12-2, 12-3, 12-8] Tanner-UNF Corporation acquired as a long-term Investment $330 million of 5% bonds, dated July 1, on July 1, 2021. Company management has the positive Intent and ability to hold the bonds until maturity, but when the bonds were acquired Tanner-UNF decided to elect the fair value option for accounting for its Investment. The market Interest rate (yleld) was 6% for bonds of similar risk and maturity. Tanner-UNF paid $300 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 $310 million. Required: 1. How would this Investment be classified on Tanner-UNF's balance sheet? 2 to 4. Prepare the journal entry to record Tanner-UNF's Investment in the bonds on July 1, 20%. Interest on December 31, 2021, at the effective market) and fair value changes as of December 31, 2021. 5. At what amount will Tanner-UNF report its Investment in the December 31, 2021. balance sheet? 6. 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 $290 million. Prepare the journal entries to record the sale. Complete this question by entering your answers in the tabs below. Reg 1 Rey 2 to 4 Req 5 Reg 6 How would this investment be classified on Tanner-UNF's balance sheet? Classification Reg 1 Req 2 to 4 >

Answer 1

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Naming convention is not available, can be slightly different: Solution: 1) Treated as "Trading Securities" Journal entries Credit Date Jul.01 Debit $ 330.00 2021 $ 30.00 $ 300.00 3) Dec.31 2018 Account title and explaination Investment in Bonds Discount on bonds Investment Cash (To record the investment in bonds) Cash (330*2.5%) Discount Bonds Investment (plug) Interest Revenue (300*3.0%) (To record the interest revenue) Fair value Adjustment (310)- (300+0.75) Unrealized holding Gain - NI (To record the fair value adjustment) $ $ 8.25 0.75 $ 9.00 4) Dec.31 $ 9.25 $ 9.25 $ 310 at fair value, because bonds are being treated as trading securities.

$ 9.25 20.00 (9.25+10.75) 10.75 (330-29.25)-290 Credit Date Jan.02 2019 Debit 20.00 $ Account title and explaination Unrealized Holding Loss - NI Fair value adjustment (6.25+13.75) (To record the adjustment) $ 20.00 2) Credit Date Jan.02 2019 Account title and explaination Debit Cash $ 290.00 Fair value adjustment (or Realized Gain on sale of investmer $ 10.75 Discount on Bonds Investment (30-0.75) $ 29.25 Investment in Bonds (To record the sale of investment) $ 330.00