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

	Date	Account Titles and Explanation	Debit	Credit	W.N
1	01-07-2018	Investments in Bonds(FV)	300
		Discount on Bond Investment		50
		Cash		250
		(To record purchase of investment)
2	31-12-2018	Cash	9		9
		Discount on Bond Investment	1		1
		Interest Revenue		10	10
		(To record interest on Bonds)

3	Date	Cash	Effective Interest	Increase in Balance	Outstanding Balance
	01-07-2018				250
	31-12-2018	9	10	1	251
			$ in Millions	$ in Millions
		Investments in Bonds(FV)		300
		Less:   Discount on Bonds
		Original Discount	50
		Amortization Discount	1	49
				251

4		Cash	240
		Discount on Bond Investment	49
		Loss on sale of Bonds (in Bal)	11
		Investments in Bonds(FV)		300
		(To record sale of Bonds)