Question

Tanner-UNF Corporation acquired as a long-term investment $240 million of 5% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Tanner-UNF paid $220 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 $225 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. 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 $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.

Answer 1

Sr No	Date	Account titles and Explanation	Debit	Credit
1	July 1 2021	Investment in bonds	240
		Discount on bond investment		20
		Cash		220
2	Dec 31 2021	Cash (5% * 6/12 * 240)	6
		Discount on bonds (6.6 - 6)	0.6
		Interest revenue (6% * 6/12 * 220)		6.6
3	Dec 31 2021	Fair value adjustment (WN 1)	4.4
		Unrealized holding gain		4.4
4	Jan 2 2022	Cash	200
		Discount on Bond investment (WN 2)	19.4
		Loss on sale of investments (WN 2)	20.6
		Investments in Bonds		240

WN 1:

Cost of investment	240
Less: discount on bond investment credit balance	-20
Discount on bond investment debt balance	0.6
Carrying value of bonds	220.6
Fair Value of bonds	225
Unrealized holding gain	4.4

WN 2:

Investment in bonds	240
Less: Unamortized discount (20 - 0.6)	-19.4
Book Value on 01/02/2019	220.6
Cash proceeds from sale of bonds	200
Loss on sale of bonds	-20.6