Question

Tanner-UNF Corporation acquired as a long-term investment $150 million of 4.0% bonds, dated July 1, on July 1, 2021. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Tanner-UNF paid $120.0 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, 2021, was $130.0 million.

Required:
1. & 2. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate.
3. At what amount will Tanner-UNF report its investment in the December 31, 2021, 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, 2022, for $100.0 million. Prepare the journal entry to record the sale.

Answer 1

Answer:

Here 1 & 2 : In the books of Tanner - UNF Corporation:

Transaction / Event	Date	Account Title & Explanations	Debit	Credit
			$	$
1.	July 1, 2021	Bond Investment	150,000,000
		Discount on bond Investment		30,000,000
		Cash		120,000,000
		To record Investment on Bonds
2.	Dec 31, 2021	Cash	3,000,000
		Discount on bond investment	600,000
		Interest Revenue(120000000*6%*1/2)		3,600,000
		To record interest on bonds receivable

3. The investment is to be reported at $ 120,600,000.

As the company has the positive intent to hold the bond investment till its maturity, the investment would be carried at its book value, and not at the fair market value.

Transaction / Event	Date	Account Title & Explanation	Debit	Credit
			$	$
4.	Jan 2. 2022	Cash	100,000,000
		Discount on Bond Investment	29,400,000
		Loss on sale of bond Investment	20,600,000
		Bond Investment		150,000,000
		To record sale of bond investment

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