Question

E 12-18 Fair value option; held-to-maturity investments • LO1 LO2 LO7 This is a variation of Exercise 12-1 focusing on the fair value option.) Tanner-UNF Company acquired as a long-term investment $240 million of 6% bonds, dated July 1. on July 1, 2012. 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 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, 2012, was $210 million. Required: 1. Would this investment be classified on Tanner-UNF's statement of financial position as held-to-maturity securities, trading securities, available-for-sale securities, significant-influence investments, or other? Explain. 2. Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2012. 3. Prepare the journal entries by Tanner-UNF to record interest on December 31, 2012, at the effective interest rate. 4. Prepare any journal entry necessary to recognize fair value changes as of December 31, 2012. 5. At what amount will Tanner-UNF report its investment in the December 31, 2012 statement of financial position? Why? 6. Suppose a bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the A bellantesale

Answer 1

4 5 6 1 The investment would be classified as "trading securities" Because it uses fair value option for accounting treatment 2 journal entry to record Tanner-UNF's investment in the bonds Debit Credit Investment in bonds 240 Discount on bond investment 40 Cash 200 7 8 9 10 11 12 7.2 3 journal entry by Tanner-UNF to record interest Cash Discount on bond 0.8 Interest Revenue (4% x 200) 13 14 15 16 240 17 40 200 18 19 4 Investment Bond discount Cash (To record fair value changes) 5 Fair market value Book value Less: Discount Increase in value 20 210 21 240 -39.2 22 200.8 23 9.2. 24 25 Fair value adjustment Unrealized holding gain 9.2 9.2 26 27 28 29 6 To record the sale of bonds Fair value Book value Decrease in value 30 190 200.8 10.8 31 32 33 20 Unrealized holding loss Fair value adjustment 20 34 35 190 36 37 10.8 Cash Fair value adjustment Discount on bond investment Investment in bonds 39.2 38 240 39 40