Question

Tanner-UNF Corporation acquired as a long-term investment $310 million of 6.0% bonds, dated July 1, on July 1, 2018. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 9% for bonds of similar risk and maturity. Tanner-UNF paid $280.0 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, 2018, was $290.0 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. At what amount will Tanner-UNF 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 $270.0 million. Prepare the journal entry to record the sale.

Answer 1

Answer

1. & 2.

		(In Million)
Date	Particulars	Dr. $	Cr. $
1-Jul-18	Investment- Bonds	310.00
	Discount on Investment- Bonds (Bal.)		30.00
	Cash		280.00
	(Being investment done recorded)
31-Dec-18	Cash ($310 Million * 6% * 6/12 Months)	9.30
	Discount on Investment- Bonds (Bal.)	3.30
	Interest Revenue ($280 Million * 9% * 6/12 Months)		12.60
	(Being Interest revenue recorded)

3.

Investment Value = Investment Cost + Interest Revenue - Discount on Investment- Bonds written off on 31 Dec, 2018

= $280 + 12.6 – 3.3

Investment Value = $289.3

4.

Date	Particulars	Dr. $	Cr. $
2-Jan-19	Cash	270.00
	Discount on Investment- Bonds (30 - 3.3)	26.70
	Loss on Sale (Bal.)	13.30
	Investment in Bonds		310.00
	(Being Investment sold at loss)

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