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Tanner-UNF Corporation acquired as a long-term investment $290 million of 6.0% bonds, dated July 1, on...

Tanner-UNF Corporation acquired as a long-term investment $290 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 7% for bonds of similar risk and maturity. Tanner-UNF paid $260.0 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 $270.0 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 $250.0 million. Prepare the journal entry to record the sale.

Expert Solution

Journal Entries:

I) Tanner- UNF 'S investment in the bonds on July1, 2018

Dr. Investment in Bonds. 290,000,000

Dr.Discount on Bond Investment 30,000,000

Cr.Cash. 260,000,000

II) Interest on December 31, 2018 at the effective rate

Dr.Cash ( 3% on 290,000,000) 87,00,000

Dr.Discount on Bonds 4,00,000

Cr.Interest Revenue(3.5%*260,000,000) 91,00,000

III). At what amount will Tanner-UNF report it's investment in the December 31, 2018 balance sheet? Why?

Ans:The management has the positive intent and ability to hold the bonds until maturity, so securities would be classified as held to maturity . Therefore , they will be reported at their unamortized cost or book value

Discount on Bonds 30,000,000

(-)Amortisation -( 4,00,000)

Unamortised Value= 29,600,000

Book Value:

Investment in Bonds-290,000,000

(-)Unamortised Value= 29,600,000

Book value= 260,400,000

IV). Sale on January 2, 2018.

Cash. 250,000,000

Discount on Bonds 29,600,000

Loss on sale 10,400,000

Investment in Bonds 290,000,000

ekkarill92 answered 2 years ago

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