Question

[This is a variation of E 12–1 modified to focus on available-for-sale securities.]
Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2021. 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. Tanner-UNF 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, 2021, was $210 million.

Required:

1. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2021.

2. Prepare the journal entry by Tanner-UNF to record interest on December 31, 2021, at the effective (market) rate.

3. Prepare any additional journal entry necessary for Tanner-UNF to report its investment in the December 31,

   2021, balance sheet.

4. SupposeMoody’sbondratingagencydowngradedtheriskratingofthebondsmotivatingTanner-UNFtosell the investment on January 2, 2022, 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

E12-10:
[This is a variation of E 12–1 focusing on available-for-sale securities.] Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% 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 $200 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 $210 million. Required:
1. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2018.
2. Prepare the journal entries by Tanner-UNF to record 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 $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.
1)		Amount in millions
Date	Account titles and Explanation	Debit	Credit
July 1 2018	Investment in Bonds	$240
	Discount on bond investment ($240-$200)		$40
	Cash		$200
2)
Dec 31 2018	Cash (6% x 6/12 x $240 million)	$7.20
	Discount on bonds ($8 -$7.2)	$0.80
	Interest revenue (8% x 6/12 x $200 million)		$8.00
3)
Cost of investment	$240
Less: discount on bond investment credit balance	-$40
Discount on bond investment debt balance	$0.80
Carrying value of bonds	$200.80
Net Unrealized holding gain (loss) as on December 31,2018 =
Fair Value- Amortized cost = fair value adjustment = $210 -$200.80	$9.20	Millions
Dec 31 2018	Fair Value Adjustment	$9.20
	Net unrealized holding - Gains and Losses		$9.20
4)
Investment in bonds	$ 240.00
Less: Unamortized discount ($40 - $.80	-$39.20
Book Value on 01/02/2019	$ 200.80
Cash proceeds from sale of bonds	-190
Gain (loss) on sale of bonds	$ 10.80
02-Jan-19	Cash	190
	Discount on Bond investment	$39.20
	Loss on sale of investments	$10.80
	Investments in Bonds		$240