Question

Tanner-UNF Corporation acquired as an investment $260 million of 6% bonds, dated July 1, on July 1, 2021. Company management is holding the bonds in its trading portfolio. 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. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was $230 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 $200 million. Prepare the journal entries required on the date of sale.

	Date General Journal Debit Credit July 01, 2021

Answer 1

Calculation of Market Effective Value on Purchase Date :
Interest Amount	=260*6%	15.6
Market Interest Yield		8%
Effective Value	=15.6/8%	195
Date	General Journal	Debit	Credit
01 July 2021	Investment in Bonds Dr.	195
	Other Comprehensive Income Dr.	25
	To Bank		220
	(Being purchased $260M of Bonds at 6% Interest rate and recorded at effective market rate.)
31 December 2021	Bank Dr.	7.8
	To Interest Income		7.8
	(Being Interest received at 6% on $260M for half year.)
31 December 2021	Investment in Bonds Dr.	35
	To Other Comprehensive Income		35
	(Being Fair value of Bonds increased to $230M.)
02 January 2022	Bank Dr.	200
	Other Comprehensive Income Dr.	10
	Profit & Loss Dr.	20
	To Investment in Bonds		230
	(Being Investment in Bonds sold at $200M.)