Question

Exercise 12-5 Trading securities (LO12-2] 2.22 points Tanner-UNF Corporation acquired as a long-term investment $260 million of 5% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 7% 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 is holding the bonds in its trading portfolio. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $215 million. eBook 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. 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 to record the sale. Hint Complete this question by entering your answers in the tabs below. Print Req 1 and 2 Req3 Reg 4 References 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. (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 1 decimal place, i.e., 5,500,000 should be entered as 5.5).) View transaction list View journal entry worksheet Event Credit No 1 Debit 260.0 General Journal Investment in bonds Discount on bond investment Cash 60.0 200.0 22 6.5 Cash Discount on bond investment Interest revenue 7.0 Req1 and 2 Req3 >

Answer 1

No	General journal	Debit	Credit
1)	investment in bonds	$ 260 million
	Discount on bonds investment ($260-$200)		$ 60 million
	cash		$ 200 million
	( to record tanner -UNF's investment in bonds on July 1,2018 )
2)	cash ( $ 260 million *2.5 % )	$ 6.5 million
	Discount on bonds ( $ 7 million - $ 6.5 million )	$ 0.5 million
	Interest revenue ($ 200 million *3.5 % )		$ 7 million
	( to record interest on December 31 ,2018 )
3)	fair value adjustment	$ 14.5 million
	unrealized holding gain ( see in note 1)		$ 14.5 million
	( to record the increase in value )
4)
	unrealized holding loss ( see in note 2)	$ 10.5 million
	fair value adjustment		$ 10.5 million
	( to record the decrease in value )
	cash	$ 190 million
	fair value adjustment	$ 10.5 million
	discount on bond investment ( $60 -$0.5 )	$ 59.5 million
	investment in bonds		$ 260 million
	( to record the sale )

NOTE 1 :
fair value			$ 215 million
book value		$ 260 million
less: discount ($ 60-0.5)		($ 59.5 )	($ 200.50 million )
increase in value			$ 14.50 million
note 2:
fair value			$ 190 million
book value		$ 260 million
less: discount ($ 60-0.5)		($ 59.5 )	($ 200.50 million )
decrease in value			($ 10.50 million )