Question

Tanner-UNF Corporation acquired as a long-term investment $200 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 $160 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 $170 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 $150 million. Prepare the journal entries to record the sale.

Answer 1

Solution 1 and 2:

Journal Entries - Tanner - UNF Corporation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	01-Jul-18	Investment in Bond Dr	$200.00
		To Cash		$160.00
		To Discount on bond investment		$40.00
		(Being investment in bond recorded)
2	31-Dec-18	Cash Dr ($200 * 7% * 6/12)	$7.00
		Discount on bond investment Dr	$0.20
		To Interest revenue ($160*9%*6/12)		$7.20
		(Being revenue recoginition for bond interest and discount amortized)

Solution 3:

Journal Entries - Tanner - UNF Corporation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	31-Dec-18	Fair value adjustment Dr ($170 - $160 - $0.20)	$9.80
		To Unrealized holding gain or loss		$9.80
		(Being adjusting entry to record investment at fair value)

Solution 4:

Journal Entries - Tanner UNF Corportation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	02-Jan-19	Unrealized holding gain or loss Dr (170-150)	$20.00
		To Fair value adjustment		$20.00
		(To record fair value adjustment)
2	02-Jan-19	Cash Dr	$150.00
		Discount on bond investment Dr ($40-$0.20)	$39.80
		Fair Value adjustment Dr	$10.20
		To Investment in Bond		$200.00
		(To record sale of investment)