Question

Tanner-UNF Corporation acquired as a long-term investment $260 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 $220 million for the bonds. The company will receive interest semiannually on June 30 and December 31. Company management is holding the bonds in its trading portfolio. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $230 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 $200 million. Prepare the journal entries to record the sale.

1. Investment in Bonds	260
Discount on Bond Investment		40
Cash		220
2.Cash	???
Discount on Bond	???
Interest Revenue		???

3. Fair Value Adjustment	???
Unrealized Holding Gain - NI (to balance)		???

4. Unrealized Holding Loss-NI	???
Fair-Value Adjustment, TS Investment		???

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 (Amount in million $)

Date	General Journal	Debit	Credit
July 1, 2018	Investment in Bonds	260
	Discount on Bond Investment (260-220)		40
	Cash		220
	(To record the investment in bonds)
Dec. 31, 2018	Cash (260 million*6%*6/12)	7.8
	Discount on Bond Investment (8.8-7.8)	1.0
	Interest Revenue (220 million*8%*6/12)		8.8
	(To record the interest revenue)

3) Journal entry to report its investment in the December 31, 2018, balance sheet.

Journal Entries (Amount in million $)

Date	General Journal	Debit	Credit
Dec. 31, 2018	Fair Value Adjustment [230 million - (220 million+1.0 million)]	9.00
	Net Unrealized holding gains and losses - I/S		9.00
	(To record the fair value adjustment)

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

Date	General Journal	Debit	Credit
Jan 2, 2019	Cash	200
	Loss on sale of investment (Bal. Fig) (260-200-39)	21.00
	Discount on bond investment ($40 - 1.0)	39.00
	Investment in Bonds		260
	(To record the sale of bonds)
Jan 2, 2019	Net Unrealized holding gains and losses - I/S	9.00
	Fair value adjustment		9.00