Question

Tallahassee Corporation was acquired as a long-term investment $240 million of 6% bonds, dated June 1, on June 1, 2022. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tallahassee Corp. 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, 2022, was $210 million.

Required:

1. Prepare the journal entry to record Tallahasse Corp. investment in the bonds on July 1, 2022.

2. Prepare the journal entry by Tallahasse Corp. to record interest on December 31, 2022, at the effective (market) rate.

3. Prepare any additional journal entry necessary for Tallahasse Corp. to report its investment in the December 31, 2022, balance sheet.

4. Suppose Moody’s bond rating agency downgraded the risk rating of the bonds motivating Tallahasse to sell the investment on January 2, 2023, for $190 million. Prepare the journal entries necessary to record the sale, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale.

Answer 1

1 & 2) Tallahassee Corporation

Journal Entries (Amounts in Million $)

No	Date	General Journal	Debit	Credit
1	Jul 1, 2022	Investment in bonds	240.0
		Discount on bonds investment (240-200)		40.0
		Cash		200.0
		(To record the investment in bonds)
2	Dec 31, 2022	Cash (240*6%*6/12)	7.2
		Discount on bonds investment (8.0-7.2)	0.8
		Interest Revenue (200*8%*6/12)		8.0
		(To record the interest revenue)

3)    Journal Entries (Amounts in Million $)

No	Event	General Journal	Debit	Credit
1	1	Fair Value Adjustment	9.2
		Unrealized Holding Gain-NI		9.2

Current Book Value of Investments = Face value - Balance of Discount on bonds

$240 - (40-0.80) = $200.8 million

Amount to be credited to unrealized gain on investments = $210.0 million - $200.8 million = $9.2 million

(As fair value of the investments is more than current book value, unrealized gain will be credited).

4) Journal Entries (Amounts in Million $)

Date	General Journal	Debit	Credit
Jan 2, 2023	Unrealized Holding Loss-NI (210-190)	20.0
	Fair Value Adjustment		20.0
	(To recognized decrease in fair value from 210 million to 190 million)
Jan 2, 2023	Cash	190.0
	Discount on bonds investment (40.0-0.8)	39.2
	Fair Value Adjustment (20.0-9.2)	10.8
	Investment in bonds		240.0

Fair Value Adjustment is credited for $20 million and debited for $9.2 million, therefore net effect of $10.8 million is debited on sale of bonds.