Question

Tanner-UNF Corporation acquired as a long-term investment $200 million of 6.0% bonds, dated July 1, on July 1, 2018. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $170.0 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 $180.0 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. At what amount will Tanner-UNF 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 $150.0 million. Prepare the journal entry to record the sale.

Answer 1

SOLUTION:

Solution 1&2: Journal Entries - Tanner UNF Credit (In Million) Event |Date Particulars Debit (In Million) 1-Jul-18 Investment in Bond Dr $200.00 To Cash $170.00 To Discount on bond investment $30.00 (Being investment in bond recorded) 31-Dec- 18 | Cash Dr (S200 * 6% * 6/12) $6.00 Discount on bond investment Dr S0.80 To Interest revenue ($170*8%*6/12) $6.80 (Being revenue recoginition for bond interest and discount amortized)
solution; 3

Amount at which Tanner-UNF will report investment on Dec 31, 2018 balance sheet = $170 + $0.80 = $170.80 million

solution;4

Journal Entries Tanner UNF Corportation Event Date Particulars Debit In Million) Credit (In Million) 2-Jan Cash Dr 19 $150.00 Discount on bond investment Dr $29.20 Loss on sale of investment Dr 20.80 To Investment in Bond $200.00 To record sale of bonds)