Question

Focus on Trading Securities

Tanner-UNF Corporation acquired as a long-term investment $240 million of 7% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 9% for bonds of similar risk and maturity. Tanner-UNF paid $200 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 $210 million.

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 $190 million. Prepare the journal entries necessary to record the sale

Answer 1

1. prepare the following journal entries to report investment in the Dec 31,2018 balance sheet as provided below
Date	Accounts and Title	DR ($ in million)	CR ($ in million)
01-Jul-18	Investments available for sale a/c    Dr	240
	Cr discount on investments purchased a/c		40
	Cr cash		200
	(To record the entry for purchases of investments for discount)
31-Dec-18	Cash a/c                                    Dr   ($240 Million*7%*6/12)	8.4
	Discount on bond purchased   Dr	0.6
	Cr Interest income (200*9%*6/12)		9
	(To record entry for interest income)
31-Dec-18	Fair value adjustment a/c Dr	9.4
	Unrealized gain on holding investment		9.4
	[ $240 million-($40-$0.60)-210 Millions]
	(To record entry for adjusting fair value)
31-Dec-18	Unrealized loss on holding Investment available for sale a/c Dr	20
	Cr Fair value adjustment a/c		20
	[ $210 million-$190 Millions]
	(To record entry to adjusting fair value )
2-Jan-19	Fair value adjustment a/c    Dr ($20-$9.40))	10.60
	Cr   Unrealized loss on holding Investment available for sale a/c		10.60
	(To record entry to adjust the value of investments)
2-Jan-19	Cash                                       a/c Dr	190
	Discount on bonds purchased a/c Dr   ($40-$0.60)	39.4
	Realized holding loss on Investment	10.60
	Cr 7% bonds available for sale		240
	( To record sale entry of bond )

Tanner-UNF report investment in the dec 31-2018 balance sheet at fair value of $210 Million.