Question

Exercise 12-10 (Algo) Available-for-sale securities [LO12-1, 12-4]

Tanner-UNF Corporation acquired as a long-term investment $220 million of 6% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale investment. 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. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was $200 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. Prepare any additional journal entry necessary for Tanner-UNF to 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 $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

Required 1 :
Date	General Journal	Debit	Credit
July 1,2021	Investments in Bonds	$ 220 Million
	Discount on Bond Investment(220-190)	$ 30 Million
	Cash		$ 190 Million
	(To record Tanner-UNF Investment in bonds on July1,2021)
Required 2 :
Date	General Journal	Debit	Credit
December 31,2021	Cash (220 Million *3%)	$ 6.6 Million
	Discount on Bonds ($7.6 - $6.6) Million	$ 1 Million
	Interest Revenue (190 Million*4%)		$ 7.6 Million
	(To record Interest on Tanner-UNF Investment in bonds on Dec 31,2021)

Required 3 :
Particulars	Amount($)	Amount($)
Fair Market Value		$ 200 Million
Book Value	$ 220 Million
Less: Discount on Bonds ($30-$1)Million	($29 Million)	($191) Million
Increase in Value		$ 9 Million

Date	General Journal	Debit	Credit
December 31,2021	Fair Value Adjustments	$ 9 Million
	Unrealized Holding Gain (I/S )		$ 9 Million
	(To record Additional entry is made on Dec 31,2021)

Required 4 :
Particulars	Amount($)	Amount($)
Fair Market Value (Sale )		$ 180 Million
Book Value	$ 220 Million
Less: Discount on Bonds ($30-$1)Million	($29 Million)	($191) Million
Decrease in Value		$ 11 Million
To Calculate the Fair Value Adjustments :
Particulars	Amount($)
Fair value adjustment on December 31,2021	$ 9 Million
Add: Decrease in Value on Jan 2,2022	$ 11 Million
Fair value Adjustment	$ 20 Million

Date	General Journal	Debit	Credit
January 2,2022	Unrealized Holding Gain (I/S )	$ 20 Million
	Fair Value Adjustments		$ 20 Million
	(To record Reclassification Additional entry is made on Jan 2,2022)
Date	General Journal	Debit	Credit
January 2,2022	Cash	$ 180 Million
	Fair Value Adjustment	$ 11 Million
	Discount on Bond Investment	$ 29 Million
	Investment in Bonds		$ 220 Million
	(To record the sale of Bond Investment )