Question

Exercise 12-25 (Algo) Fair value option; held-to-maturity investments [LO12-1, 12-2, 12-3, 12-8] Tanner-UNF Corporation acquired as a long-term investment $190 million of 8% bonds, dated July 1, on July 1, 2021. 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 10% for bonds of similar risk and maturity. Tanner-UNF paid $160 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 $170 million. Required: 1. How would this investment be classified on Tanner-UNF's balance sheet? 2. to 4. Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2021, interest on December 31, 2021, at the effective (market) and fair value changes as of December 31, 2021. 5. At what amount will Tanner-UNF report its investment in the December 31, 2021, balance sheet? 6. Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2022, for $140 million. Prepare the journal entries to record the sale.

Answer 1

Solution 1:

This investment will be classified on Tanner UNF's Balance Sheet as "trading securities".

Solution 2 to 4:

Journal Entries - Tanner - UNF Corporation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	01-Jul-21	Investment in Bond Dr	$190.00
		To Cash		$160.00
		To Discount on bond investment		$30.00
		(Being investment in bond recorded)
2	31-Dec-21	Cash Dr ($190 * 8% * 6/12)	$7.60
		Discount on bond investment Dr	$0.40
		To Interest revenue ($160*10%*6/12)		$8.00
		(Being revenue recoginition for bond interest and discount amortized)
3	31-Dec-21	Fair value adjustment Dr ($170 - $160 - $0.40)	$9.60
		To Unrealized holding gain or loss		$9.60
		(Being adjusting entry to record investment at fair value)

Solution 5:

Investment to be reported = $170 millions

Solution 6:

Journal Entries - Tanner UNF Corportation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	02-Jan-22	Unrealized holding gain or loss Dr (170-140)	$30.00
		To Fair value adjustment		$30.00
		(To record fair value adjustment)
2	02-Jan-22	Cash Dr	$140.00
		Discount on bond investment Dr ($30-$0.40)	$29.60
		Fair Value adjustment Dr	$20.40
		To Investment in Bond		$190.00
		(To record sale of investment)

Answer 2

for required 1) its held to securities

for required 4) journal entry 3 its dr. fair value adjustment

                                                 cr. gain on investment(unrealized, NI)

for required 6) journal entry 1 its dr. loss on investment(unrealized, NI)

                                                       cr. fair value adjustment