Question

Tanner-UNF Corporation acquired as an investment $260 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 $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 $230 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 $170 million. Prepare the journal entries required on the date of sale.

Answer 1

Ans:

	Journal Entries		(Amount In Millions)
1&2	Event	Particulars	Debit($)	Credit($)
	1	Investment in Bonds A/c	260
		Discount on Bond Investment(Bal)		40
		Cash		220
		(To record investments in Bonds)
	2	Cash A/c ( 4 %* 260)	10.4
		Discount on Bonds A/c (Bal)	0.6
		Interest Revenue ( 5 %* 220)		11
		(To record Interest)

3		Amount to be reported in Balance sheet
		Book Value	260
		Less:Discount ( 40 - 0.6)	-39.4	220.6
		Amount to be reported in Balance sheet		220.6

3	Part C
	31-Dec	Fair Value Adjustments	9.4
		Net Unrealised Holding gains and losses		9.4

4		Cash A/c	170
		Discount on Bond Investment ( 40 - 0.6)	39.4
		Loss on sale of Investment (Bal)	50.6
		Investment in bonds		260
		(To record the sale)

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