Question

Tanner-UNF Corporation acquired as a long-term investment $220 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 $190 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 $200 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 $180 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 & 2) Journal entries to record investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate is shown as follows:-

Journal Entries (Amounts in million $)

Date	General Journal	Debit	Credit
July 1, 2018	Investment in Bonds	220.00
	Discount on bond investment (220-190)		30.00
	Cash		190.00
	(To record the investment in bonds)
Dec. 31, 2018	Cash (220 million*6%*6/12)	6.60
	Discount on bond investment (7.60-6.60)	1.00
	Interest Revenue (190 million*8%*6/12)		7.60
	(To record the interest revenue)

3) Tanner UNF will report its investment in the December 31, 2018, balance sheet at its fair value i.e. $200 million. The additional required journal entry is shown as follows:-

Journal Entries (Amounts in million $)

Date	General Journal	Debit	Credit
Dec 31, 2018	Fair Value Adjustment [$200.00 - ($190.00+$1.00)]	9.00
	Net unrealized holding gains and losses-I/S		9.00

4) Journal Entries to record the sale (Amount in million $)

Date	General Journal	Debit	Credit
Jan 2, 2019	Cash	180.00
	Discount on bond investment (30.00-1.00)	29.00
	Loss on sale of investment (Bal fig) (220-180-29.00)	11.00
	Investment in Bonds		220.00
	(To record the sale of bonds)
Jan 2, 2019	Net Unrealized holding gains and losses - I/S	9.00
	Fair Value Adjustment		9.00