Question

Tanner-UNF Corporation acquired as a long-term investment $260 million of 7% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 9% 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 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 $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 necessary to record the sale, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale.

If no journal entry is required select "No journal entry required." Enter answers rounded to millions to one decimal place i.e. 5,500,000= 5.5

Answer 1

1)To record Bonds on July1,2018

S.No.	General Journal	Debit	Credit
1.	Available for sale-Bond Investments	$260
	Discount On Bonds		$40
	Cash		$220
	(Being Investment in Bonds Made)

2)To record Interest on Bonds on December 31,2018(6 months)

S.No.	General Journal	Debit	Credit
2.	Cash ($260*7%*6/12)	$9.10
	Discount On Bonds	$0.80
	Interest Revenue($220*9%*6/12)		$9.90
	(Being Interest on Bonds Recorded)

3)Additional Entry To record Bonds on December31,2018 at Fair Value

S.No.	General Journal	Debit	Credit
3.	Unrealised Gain/loss-OCI	$9.1
	Available for sale-Bond Investments		$9.1
	(Being Investment Recognised At Fair Value through OCI)

4)Sale and Fair Value Adjustment

S.No.	General Journal	Debit	Credit
4.	Available for sale-Bond Investments	$9.1
	Unrealized Gain/Loss - OCI		$9.1
	(Fair Value Adjustment)
	Cash	$200
	Loss On Sale	$20.80
	Discount On Bonds	$39.2
	Available for sale-Bond Investments		$260
	(Being Investment Sold)