Question

Tanner-UNF Corporation acquired as an investment $240 million of 8% bonds, dated July 1, on July 1, 2021. Company management is holding the bonds in its trading portfolio. 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 $210 million.

Question:
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 $180 million. Prepare the journal entries required on the date of sale.

Answer 1

jouranl entries

		($ in millions)
Date	Accounts	Debit	Credit
Req	Investment in bonds (face amount)	$               240.00
july -1-21	Discount on bond investment (difference)		$   40.00
	Cash (price of bonds)		$ 200.00
Req 2	Cash (4% x $240 million)	$ 9.60
dec-31-21	Discount on bond investment (difference)	$                   0.40
	Interest revenue (5% x $200)		$ 10.00
Req 3	Tanner-UNF reports its investment in the December 31, 2018, balance sheet at its amortized cost – that is, its book value:
dec-31-21
	Investment in bonds	$    240.00
	Less: Discount on bond investment ($40 – .4million)	39.60
	Amortized cost	$    200.40
	If sale before maturity isn’t an alternative, increases and decreases in the market value between the time a debt security is acquired and the day it matures to a prearranged maturity value are relatively unimportant. For this reason, if an investor has the “positive intent and ability” to hold the securities to maturity, investments in debt securities are classified as “held-to-maturity” and reported at amortized cost rather than fair value in the balance sheet.
		($ in millions)
	Accounts	Debit	Credit
Req 4	Cash (proceeds from sale)	$    180.00
jan- 2-22	Discount on bond investment (balance, determined above)	$ 39.60
	Loss on sale of investments (to balance)	$ 20.6
	Investment in bonds (face amount)		$ 240.00

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