Question

Tanner-UNF Corporation acquired as a long-term investment $300 million of 6% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $250 million for the bonds. The company will receive interest semiannually on June 30 and December 31. Company management has classified the bonds as available-for-sale investments. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $260 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. Prepare any additional journal entry necessary for Tanner-UNF to 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 $240 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

1.Prepare journal entry to record investment in bonds as shown below:

Date	Account title and explanation	PR.NO	Debit $ in millions	Credit $ in millions
01-07-2018	Investment in Bonds (face value)		240
	Discount on bond investment			40
	Cash			200
	(To record purchase of investment)

Calculate discount on bond investment is as follows:

Discount= Face value of bond - Actual amount paid for Bonds

= $240 million - $200 million

= $ 40 million

2. Prepare journal entry for effective market interest rate on december 31, 2018 as show below

Date	Account title and explanation	PR.NO	Debit $ in millions	Credit $ in millions
31-12-2018	Cash ($240 x 7% x (6/12)		8.4
	Discount on bond investment		0.6
	Interest revenue ($200 x 9% x (6/12)			9
	(To record interest on bond)

Discount amortized = $9 million - $8.4 million = $0.6 million

3. Calculate T UNF Corporation to report its investment in December 31, 2018 as shown below:

Date	Cash	Effective	Increase in	Outsanding
		interest	balance	balance
01-07-2018				$200
3112-2018	$8.4	$9	$0.6=($9-$8.4)	$200.6

	$	$
	in millions	in millions
Investment in bond(face value)		$240
Less:Discount on bonds
Original discount	40
Amortization discount	0.6
Amortized cost		$200.6

4.Prepare journal entry for sale of investment of T UNF Corporation as shown below:

  

Date	Account title and explanation	PR.NO	Debit $ In millions	Credit $ In millions
	Cash		190
	Discount on bond investment ($40-$0.6)		39.4
	Loss on sale of bonds (in balance)		10.6
	Investment in bonds (face value)			240
	(To record the sale of bonds)