In: Accounting
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:
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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