Question

Exercise 12-1 (Static) Securities held-to-maturity; bond investment; effective interest, discount [LO12-1]

Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2021. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $200 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, 2021, was $210 million.

Required:
1. & 2. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate.
3. At what amount will Tanner-UNF report its investment in the December 31, 2021, 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, 2022, for $190 million. Prepare the journal entry to record the sale.

No	Date	General Journal	Debit	Credit
1	July 01, 2021	Investment in bondsselected answer correct	240.0selected answer correct	not attempted
		Discount on bond investmentselected answer correct	not attempted	40.0selected answer correct
		Cashselected answer correct	not attempted	200.0selected answer correct

Complete this question by entering your answers in the tabs below.

• Req 1 and 2
• Req 3
• Req 4

At what amount will Tanner-UNF report its investment in the December 31, 2021, balance sheet? (Enter your answer in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

	Investment $170.8selected answer incorrect million

Suppose Moody’s bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2022, for $190 million. Prepare the journal entry to record the sale. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

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No	Date	General Journal	Debit	Credit
1	January 02, 2022	Investment in bondsselected answer incorrect	190selected answer incorrect	not attempted
		Discount on bond investmentselected answer incorrect	not attempted	40selected answer incorrect
		Cashselected answer incorrect	not attempted	160selected answer incorrect
2	January 02, 2022	Cashselected answer correct	not attempted	not attempted
		Discount on bond investmentselected answer correct	not attempted	not attempted

Answer 1

Solution 1&2:

Journal Entries - Tanner UNF
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	1-Jul-21	Investment in Bond Dr	$240.00
		To Cash		$200.00
		To Discount on bond investment		$40.00
		(Being investment in bond recorded)
2	31-Dec-21	Cash Dr ($240 * 6% * 6/12)	$7.20
		Discount on bond investment Dr	$0.8
		To Interest revenue ($130*8%*6/12)		$ 8.00
		(Being revenue recognition for bond interest and discount amortized)

Solution 3:

Tanner-UNF report its investment in the December 31, 2021, balance sheet at amortized cost = $200 + $0.80 = $200.80milion

Solution 4:

Journal Entries - Tanner UNF Corportation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	2-Jan-22	Cash Dr	$190.00
		Discount on bond investment Dr	$39.20
		Loss on sale of investment Dr	$10.8
		To Investment in Bond (To record sales of bonds)		$240.00