Question

Tanner-UNF Corporation acquired as a long-term investment $270 million of 8% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 10% for bonds of similar risk and maturity. Tanner-UNF paid $230 million for the bonds. The company will receive interest semiannually on June 30 and December 31. Company management has classified the bonds as available-for-sale investments. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $240 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 $220 million. Prepare the journal entries necessary to record the sale, including updating the fair-value adjustment, recording any reclassification adjustment, and recording 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	$270.00
		To Cash		$230.00
		To Discount on bond investment		$40.00
		(Being investment in bond recorded)
2	31-Dec-18	Cash Dr ($270 * 8% * 6/12)	$10.80
		Discount on bond investment Dr	$0.70
		To Interest revenue ($230*10%*6/12)		$11.50
		(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 ($240 - $230 - $0.70)	$9.30
		To Unrealized holding gain or loss - OCI		$9.30
		(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 - OCI Dr	$9.30
		To Fair value adjustment		$9.30
		(Being reversal of fair value adjustment at the time of sale)
2	2-Jan-19	Cash Dr	$220.00
		Discount on bond investment Dr	$39.30
		Loss on sale of investment Dr	$10.70
		To Investment in Bond		$270.00
		(To record sale of investment)