Question

Tanner-UNF Corporation acquired as a long-term investment $235 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 $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 $215 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 $180 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

July 1, 2018	Investment in Bonds	235
	Discount on Bond Investment		35
	Cash		200
2	Cash 235*8%*6/12	9.4
	Discount on bonds	0.6
	Interest Revenue 200*5%		10
3	Fair market value		215
	Book value	235
	Less: Discount(35-0.6)	34.4	200.6
	Increase in value		14.4
	Fair value adjustment	14.4
	Unrealized holding gain		14.4
4	Fair value	180
	Book value	200.6
	Decrease in value	-20.6
	Unrealized holding loss	20.6
	Fair value adjustment		20.6
	Cash	180
	Less:Fair value adjustment	20.6
	Less:Discount on bond investment	34.4
	Investment in bonds		235