Question

Exercise 12-10 Available-for-sale securities [LO12-1, 12-4]

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 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 $215 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. 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.

Answer 1

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Ignore the explanation line in blue while putting answer in the question format if not require: Solution Treated as AFS Securities: Naming convention is not available, can be slightly different ournal entries Date Account title and explaination Debit Credit S 260.0 1) Jul.01 Investment in Bond:s $ 60.0 2018 Discount on bonds Investment (260-200) $ 200.0 Cash To record the investment in bonds) $ 6.5 2) | Dec.31 | Cash (260*2.5%) $ 0.5 2018 Discount on bonds Investment (plug) $7.0 Interest Revenue (200*3.5%) To record the interest revenue) $ 14.5 3) Dec.31 Fair value Adjustment (215)- (200+0.5) $ 14.5 Unrealized holding Gain OCI 2018 To record the fair value adjustment)

14.5$ 25.0 (8.8+11.20) $10.50 (260-59.5)-190 4) 1) Date Account title and explaination Debit Credit $ 25.0 Jan.02 Unrealized Holding Loss oCI $ 25.0 Fair value adjustment 14.5+10.50) 2019 To record the fair value adjustment) 2) Date Account title and explaination Debit Credit $ 10.5 Jan.02 Fair value adjustment $ 10.5 Reclassification Adjustement oc 2019 To Record the entry for reclassification adjustment) 3) Date Account title and explaination Debit Credit 190.0 $ 59.5 Jan.02 Cash Discount on Bonds Investment 2019 $ 10.5 Loss NI $260.0 Investment in Bonds To record the sale of investment)