Question

Tanner-UNF Corporation acquired as a long-term investment $260 million of 7.0% 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 9% for bonds of similar risk and maturity. Tanner-UNF paid $230.0 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, 2018, was $240.0 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. At what amount will Tanner-UNF 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 $220.0 million. Prepare the journal entry to record the sale.

Answer 1

Solution 1&2:

Journal Entries - Tanner UNF
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	1-Jul-18	Investment in Bond Dr	$260.00
		To Cash		$230.00
		To Discount on bond investment		$30.00
		(Being investment in bond recorded)
2	31-Dec-16	Cash Dr ($260 * 7% * 6/12)	$9.10
		Discount on bond investment Dr	$1.25
		To Interest revenue ($230*9%*6/12)		$10.35
		(Being revenue recoginition for bond interest and discount amortized)

Solution 3:

Tanner-UNF report its investment in the December 31, 2018, balance sheet at amortized cost = $230 + $1.25 = $231.25 million

Solution 4:

Journal Entries - Tanner UNF Corportation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	2-Jan-19	Cash Dr	$220.00
		Discount on bond investment Dr	$28.75
		Loss on sale of investment Dr	$11.25
		To Investment in Bond		$260.00
		(To record sale of bonds)