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 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 $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 to record the sale.
Journal Entries :
1) Investment in Bonds
Dr.Investment in Bonds 270,000,000
Dr.Discount on Bonds 40,000,000
Cr.Cash 230,000,000
2) Interest on December 31, 2018 at the effective rate
Dr.Cash(4%*270,000,000) 10,800,000
Dr.Discount on Bonds 7,00,000
Cr.Interest Revenue(5%*230,000,000) 11,500,000
3)
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 :40,000,000
Amortisation. (7,00,000)
Unamortised Amount =39.300,000
Investment in Bonds. 270,000,000
(-)Unamortised Amount =39.300,000
Book value . 230,700,000
4) Sale of Investment on January 2, 2019
Dr. Cash. 220,000,000
Dr. Discount on Bonds. 39,300,000
Dr Loss on sale. 10,700,000
Cr. Investment in Bonds. 270,000,000
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