Question

Tanner-UNF Corporation acquired as a long-term investment $280 million of 6.0% 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 8% for bonds of similar risk and maturity. Tanner-UNF paid $250.0 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 December 31, 2021, was $260.0 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. At what amount will Tanner-UNF 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 $240.0 million. Prepare the journal entry to record the sale.

Answer 1

Ans:

	Journal Entries		(Amount In Millions)
1&2	Event	Particulars	Debit($)	Credit($)
	1	Investment in Bonds A/c	280
		Discount on Bond Investment(Bal)		30
		Cash		250
		(To record investments in Bonds)
	2	Cash A/c ( 3 %* 280)	8.4
		Discount on Bonds A/c (Bal)	1.6
		Interest Revenue ( 4 %* 250)		10
		(To record Interest)
3		Amount to be reported in Balance sheet
		Book Value	280
		Less:Discount ( 30 - 1.6)	-28.4	251.6
		Amount to be reported in Balance sheet		251.6
4		Cash A/c	240
		Discount on Bond Investment ( 30 - 1.6)	28.4
		Loss on sale of Investment (Bal)	11.6
		Investment in bonds		280
		(To record the sale)

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