Question

In: Accounting

Tanner-UNF Corporation acquired as a long-term investment $310 million of 6% bonds, dated July 1, on...

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.

Solutions

Expert Solution

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.


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