Question

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).)

Answer 1

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