In: Accounting
Tanner-UNF Corporation acquired as a long-term investment $310
million of 6% bonds, dated July 1, on July 1, 2018. Company
management has the positive intent and ability to hold the bonds
until maturity, but when the bonds were acquired Tanner-UNF decided
to elect the fair value option for accounting for its investment.
The market interest rate (yield) was 9% for bonds of similar risk
and maturity. Tanner-UNF paid $280 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 $290 million.
Required:
1. How would this investment be classified on
Tanner-UNF's balance sheet?
2. to 4. Prepare the journal entry to record
Tanner-UNF’s investment in the bonds on July 1, 2018, interest on
December 31, 2018, at the effective rate and fair value changes as
of December 31, 2018.
5. At what amount will Tanner-UNF report its
investment in the December 31, 2018, balance sheet?
6. 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 $270 million. Prepare the
journal entry to record the sale.
1)The investment would be classified as Trading Investments in Financial Statements since Tanner has decided the Fair value option for the bond.
2 to 4) Amount in Million USD
1-Jul | Trading Investment | 280 | |
Cash | 280 | ||
31-Dec | Cash | 9.3 | |
Trading Investments | 3.3 | ||
Interest Revenue | 12.60 | ||
31-Dec | Fair value Adjustment | 6.70 | |
Unrealised Holding Gain or Loss | 6.70 | ||
(($280+$3.3)-290) |
The unrealised gain will be recorded in profit and loss statement.
5) Tanner will record its investmet at $ 290 on balance sheet date.