Question

Tanner-UNF Corporation acquired as a long-term investment $290 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 Tyled) was 7X for bonds of similar risk and maturity, Tanner-UNF paid $260 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 $270 million Required: 1. How would this Investment be classified on Tanner-UNP'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 $250 million Prepare the journal entry to record the sale

Answer 1

Ans:

	Journal Entries		(Amount In Millions)
1&2	Date	Particulars	Debit($)	Credit($)
	07.01.2021	Investment in Bonds A/c	290
		Discount on Bond Investment(Cr)		30
		Cash		260
		(To record investments in Bonds)
	12.31.2021	Cash A/c ( 3 %* 290)	8.7
		Discount on Bonds A/c	0.4
		Interest Revenue ( 3.5 %* 260)		9.1
		(To record Interest)
3
		Fair Market Value		270
		Book Value	290
		Less:Discount ( 30 - 0.4)	-29.6	260.4
		Increase in Value		9.6
		Amount to be reported in Balance sheet=	Book Value=	260.4
	12.31.2021	Fair Value Adjustment A/c	9.6
		Unrealised Holding Gain(I/S)		9.6
		(To report Its Investment)
4
		Fair Market Value	250
		Book Value	-260.4
		Decrease in Value	-10.4
1	Jan-02	Unrealised Holding Loss(I/S) A/c	20
		Fair Value Adjustment		20
		(To record Decrease in Value)
2	01-02-2021	Fair Value Adjustment	10.4
		Reclassification Adjustment		10.4
3	01-02-2021	Cash A/c	250
		Discount on Bond Investment ( 30 - 0.4)	29.6
		Loss NI	10.4
		Investment in bonds		290
		(To record the sale)