In: Accounting
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).)
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 |