Question

In: Accounting

Tanner-UNF Corporation acquired as a long-term investment $230 million of 8% bonds, dated July 1, on...

Tanner-UNF Corporation acquired as a long-term investment $230 million of 8% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 10% for bonds of similar risk and maturity. Tanner-UNF paid $210 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 $220 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 $200 million. Prepare the journal entries necessary to record the sale, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale.

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 $200 million. Prepare the journal entries necessary to record the sale, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

Solutions

Expert Solution

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.

Answer:

Amount in millions

Date Account Debit Credit Remarks
July 1, 2018 Investments in bond $230.0
Cash $210.0
Discount on investments in bond $20.0 (230-210)
(Being investment in bond recognised)
December 31, 2018 Cash $9.2 (230*8%/2)
Discount on investments in bond $1.3 (10.5-9.2)
Interest income $10.5 (210*10%/2)
(Being interest income recognised 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.

Answer:

Amount in millions

Date Account Debit Credit Remarks
December 31, 2018 Fair value adjustment- investments in bond - Balance sheet $8.7 Note 1
Fair value gain/loss on investments in bond - Income statement/OCI $8.7
(Being fair value adjustment of investment in bond recognised)
Note 1
Particulars December 31, 2018
Carrying value of bond $230.0
Less: Carrying value of Discount on investments in bond ($18.7) (-20+1.3)
Less: Fair value of bond ($220.0)
Fair value gain ($8.7)

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 $200 million

Answer:

Amount in millions

Date Account Debit Credit Remarks
January 2, 2019 Fair value gain/loss on investments in bond - Income statement/OCI $20.0 Note 2
Fair value adjustment- investments in bond - Balance sheet $20.0
(Being fair value adjustment of investment in bond recognised)
January 2, 2019 Cash $200.0
Discount on investments in bond $18.7 (20-1.3)
Fair value adjustment- investments in bond - Balance sheet $11.3 (230-200-18.7)
Investments in bond $230.0
(Being disposal of investment in bond recognised)
Note 2
Particulars January 2, 2019
Carrying value of bond $230.0
Fair value adjustment on December 31, 2018 $8.7
Less: Carrying value of Discount on investments in bond ($18.7) (-20+1.3)
Less: Fair value of bond ($200.0)
Fair value loss $20.0

Related Solutions

Tanner-UNF Corporation acquired as a long-term investment $240 million of 8% bonds, dated July 1, on...
Tanner-UNF Corporation acquired as a long-term investment $240 million of 8% 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 10% 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. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was...
Tanner-UNF Corporation acquired as a long-term investment $270 million of 8% bonds, dated July 1, on...
Tanner-UNF Corporation acquired as a long-term investment $270 million of 8% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 10% for bonds of similar risk and maturity. Tanner-UNF paid $230 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 $240...
Tanner-UNF Corporation acquired as a long-term investment $235 million of 8% bonds, dated July 1, on...
Tanner-UNF Corporation acquired as a long-term investment $235 million of 8% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 10% 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 is holding the bonds in its trading portfolio. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was...
Tanner-UNF Corporation acquired as a long-term investment $225 million of 8% bonds, dated July 1, on...
Tanner-UNF Corporation acquired as a long-term investment $225 million of 8% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 10% for bonds of similar risk and maturity. Tanner-UNF paid $180 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 $190...
Tanner-UNF Corporation acquired as a long-term investment $150 million of 4.0% bonds, dated July 1, on...
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...
Tanner-UNF Corporation acquired as a long-term investment $280 million of 6% bonds, dated July 1, on...
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...
Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on...
Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% 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 8% 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. As a result of changing market conditions, the fair value of the bonds at...
Tanner-UNF Corporation acquired as a long-term investment $190 million of 8.0% bonds, dated July 1, on...
Tanner-UNF Corporation acquired as a long-term investment $190 million of 8.0% 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 10% for bonds of similar risk and maturity. Tanner-UNF paid $160.0 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...
Tanner-UNF Corporation acquired as a long-term investment $290 million of 6.0% bonds, dated July 1, on...
Tanner-UNF Corporation acquired as a long-term investment $290 million of 6.0% bonds, dated July 1, on July 1, 2018. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 7% for bonds of similar risk and maturity. Tanner-UNF paid $260.0 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...
Tanner-UNF Corporation acquired as a long-term investment $320 million of 4.0% bonds, dated July 1, on...
Tanner-UNF Corporation acquired as a long-term investment $320 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 $290.0 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...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT