Question

Tanner-UNF Corporation acquired as a long-term investment $280 million of 6% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $240 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 $250 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. Prepare any additional journal entry necessary for Tanner-UNF to 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 $230 million. Prepare the journal entries necessary to record the sale, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale.

1. journal entry worksheet: July 1, 2021 - Record Tanner-UNF’s investment in the bonds on July 1, 2021.

2. journal entry worksheet: December 31, 2021 - Record interest on December 31, 2021

3. journal entry worksheet: December 31, 2021 - Record the entry for fair value adjustment

4. Journal entry worksheet

(a) January 2, 2022 - Record the entry for fair-value adjustment, AFS investment.

(b) January 2, 2022 - Record the entry for reclassification adjustment.

(c) January 2, 2022 -Record the sale of the investment by Tanner-UNF.

Answer 1

Answer 1 & 2.
Journal Entry		Amount in $ Million
Date	Account Titles	Debit	Credit
01-Jul-21	Investment in Bonds	280
	Cash		240
	Discount on Bonds		40
	(record the purchase of bonds)
31-Dec-21	Cash ( 280 x 6% x 6/12 )	8.4
	Discount on Bonds	1.2
	Interest Revenue ( 240 x 8% x 6/12 )		9.6
	(Record the interest received)
Answer 3.
Journal Entry		Amount in $ Million
Date	Account Titles	Debit	Credit
31-Dec-21	Fair Value Adjustment ( 250 - ( 240 + 1.20 ) )	8.8
	Net Unrealized Holding Gains & Losses		8.8
	(record the fair value adjustment)
Answer 4.
Journal Entry		Amount in $ Million
Date	Account Titles	Debit	Credit
02-Jan-22	Cash	230
	Discount on Bonds ( 40 - 1.20 )	38.8
	Loss on Sale of Bonds	11.2
	Investment in Bonds		280
	(Record the sale of Bonds)
02-Jan-22	Net Unrealized Holding Gains & Losses	8.8
	Fair Value Adjustment		8.8