Question

Tanner-UNF Corporation acquired as a long-term investment $300 million of 10% bonds, dated July 1, on July 1, 2018. 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. 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 $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. 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 TannerUNF to sell the investment on January 2, 2019, for $360 million. Prepare the journal entries 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:

Journal Entries - Tanner - UNF Corporation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	31-Dec-18	Fair value adjustment Dr ($375 - $364 + $2.26)	$13.26
		To Unrealized holding gain or loss - NI		$13.26
		(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	2-Jan-19	Unrealized holding gain or loss - NI	$13.26
		To Fair value adjustment		$13.26
		(Being reversal of fair value adjustment at the time of sale)
2	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)