Question

Tanner-UNF Corporation acquired as a long-term investment $300 million of 10% 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 7% for bonds of similar risk and maturity. Tanner-UNF paid $364 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 $375 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 TannerUNF to sell the investment on January 2, 2019, for $360 million. Prepare the journal entry to record the sale.

Answer 1

Solution 1&2:

Journal Entries - Tanner - UNF Corporation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	1-Jul-18	Investment in Bond Dr	$300.00
		Premium on bond investment Dr	$64.00
		To Cash		$364.00
		(Being investment in bond recorded)
2	31-Dec-18	Cash Dr ($300 * 10% * 6/12)	$15.00
		To Interest revenue ($364*7%*6/12)		$12.74
		To Premium on bond investment		$2.26
		(Being revenue recognition for bond interest and premium amortized)

Solution 3:

Tanner-UNF report its investment in the December 31, 2018, balance sheet at = $364 - $2.26 = $361.74 million

Solution 4:

Journal Entries - Tanner UNF Corportation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	2-Jan-19	Cash Dr	$360.00
		Loss on sale of investment Dr	$1.74
		To Investment in Bond		$300.00
		To Premium on bond investment		$61.74
		(To record sale of investment)