Question

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

Requirement 1

Journal Entry
Date	Accounts & Expalnations	Debit	Credit
July1,2021	Bank	220000000
	Long term 6% bond		220000000
	(sale of long term Investment)
July1,2021	8% bond	190000000
	Bank		190000000
	(Purchase Of 8% Bond)
Dec 31,2021	Bank	15200000
	Interest Recd. On bond		15200000
	(Semi- annual Interest Recd.)

Requirement 2

Journal Entry
Dec 31,2021	Fair Value Adjustment	10000000
	Unrealised profit		10000000
	(Fair Market value Adjusted)
Jan 2, 2022	Bank	180000000
	loss on sale of bond	10000000
	8% bond		190000000
	(Sale Of 8% Bond)
Jan 2, 2022	Unrealised profit	10000000
	Fair Value Adjustment		10000000
	Adjustment Entry at the time of sales)