Question

Tanner-UNF Corporation acquired as a long-term investment $300 million of 7% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $280 million for the bonds. The company will receive interest semiannually on June 30 and December 31. Company management has classified the bonds as available for sale investments. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $285 million. Required: 1. & 2. Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market rate. 3. Prepare any additional journal entry necessary for Tanner-UNF to report its investment in the December 31, 2018, 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, 2019, for $260 million. Prepare the journal entries necessary to record the sale, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale, Complete this question by entering your answers in the tabs below. Reg 1 and 2 Reg 3 Reg 4 Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2018 and effective market) rate. (If no entry is required for a transaction/event, select "No journal entry your answers in millions rounded to I decimal place, (l.e., 5,500,000 should be entered as 5.5

Answer 1

1 & 2.	Date	Account titles and explanation					Debit	Credit
	July 1.	Investment in bonds					300
		Discount on bond investment			(Plug)			20
		Cash						280
		(Acquired long-term investment)
	Dec 31.	Cash			(300*7%*1/2)		10.5
		Discount on bond investment			(Plug)		0.7
		Interest revenue			(280*8%*1/2)			11.2
		(Interest earned for the half year)
3	Date	Account titles and explanation					Debit	Credit
	Dec 31.	Fair value adjustment				(Note:1)	4.3
		Unrealized holding gain						4.3
		(Increase in value recorded)
	Note:1
					$	$
	Fair market value					285
	Less: Carrying value of investment
	Book value				300
	Less: Discount		(20-0.7)		19.3	280.7
	Increase in value					4.3
4					$
	Sales value				260
	Less: Carrying value of investment				280.7
	Decrease in value				-20.7
	Current balance in fair value adjustment=$ 4.3 (Increase)
	This has to make as $ 20.7 decrease
	Hence,loss to be recognized=4.3+20.7=$ 25
	Date	Account titles and explanation					Debit	Credit
	Jan 2.	Unrealized holding loss-NI					25
		Fair value adjustment						25
		(Decrease in value recorded)
	Jan 2.	Cash					260
		Fair value adjustment			(Plug)		20.7
		Discount on bond investment					19.3
		Investment in bonds						300
		(Investment sold)