Question

I need help with part 6. It wants A) Record the entry to adjust to fair value on the date of sale and B) Record the sale of the bonds on January 2, 2019.

Tanner-UNF Corporation acquired as a long-term investment $260 million of 6% bonds, dated July 1, on July 1, 2018. 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 (yield) was 9% for bonds of similar risk and maturity. Tanner-UNF paid $220 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, 2018, was $230 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, 2018, interest on December 31, 2018, at the effective rate and fair value changes as of December 31, 2018.
5. At what amount will Tanner-UNF report its investment in the December 31, 2018, 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, 2019, for $210 million. Prepare the journal entry to record the sale.

Req 1 Req 2 to 4 Req 5 Req 6 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 $210 million. Prepare the journal entry to record the sale. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).) Show less No Event General Journal Debit Credit Unrealized holding loss-NI Fair value adjustment 210.00 Cash Fair value adjustment Discount on bond investment < Req 5 Req 6 )

Answer 1

6)

No	Event	General Journal	Debit	Credit
1	1	Unrealized holding loss-NI ($7.90+12.10)	$20.00
		Fair value adjustment		$20.00
		(To record the entry to adjust fair value)
2	2	Cash	$210.00
		Fair value adjustment (222.10-210.00)	$12.10
		Discount on bond investment (40-2.10)	$37.90
		Investments in bonds		$260.00
		(To record sale)

Unrealized holding gain= Book value= Investment in bonds-Discount on bonds

= $260-(40-2.10)

= $222.10

Working Notes

Required 2 to 4

No	Event	General Journal	Debit	Credit
1	1	Investment in bonds	$260.00
		Discount on bond investment (260-220)		$40.00
		Cash		$220.00
		(To record investment in bonds)
2	2	Cash ($260*6%*6/12)	$7.80
		Discount on bond investment ($9.90-7.80)	$2.10
		Interest revenue ($220*9%*6/12)		$9.90
		(To record interest)
3	3	Fair value adjustment	$7.90
		Unrealized holding gain- NI		$7.90
		(To record fair value changes)

Fair value of the bonds, December 31, 2018		$230
Book value of the bonds	$260
Less: Discount on the bonds (40-2.10)	(37.90)	(222.10)
Increase in value of the bonds		$7.90