Question

Tanner-UNF Corporation acquired as a long-term investment $190 million of 8.0% 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 10% for bonds of similar risk and maturity. Tanner-UNF paid $160.0 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 $170.0 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 $140.0 million. Prepare the journal entry to record the sale

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	$190.00
		To Cash		$160.00
		To Discount on bond investment		$30.00
		(Being investment in bond recorded)
2	31-Dec-21	Cash Dr ($190 * 8% * 6/12)	$7.60
		Discount on bond investment Dr	$0.40
		To Interest revenue ($160*10%*6/12)		$8.00
		(Being revenue recoginition for bond interest and discount amortized)

Solution 3:

Tanner-UNF report its investment in the December 31, 2021, balance sheet at amortized cost i.e. = $160 + $0.40 = $160.40 million

Solution 4:

Journal Entries - Tanner UNF Corportation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	2-Jan-22	Cash Dr	$140.00
		Discount on bond investment Dr	$29.60
		Loss on sale of investment Dr	$20.40
		To Investment in Bond		$190.00
		(To record sale of bonds)