Question

Tanner-UNF Corporation acquired as an investment $290 million of 8% bonds, dated July 1, on July 1, 2021. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 10% for bonds of similar risk and maturity. Tanner-UNF paid $260 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, 2021, was $270 million. Required: 1. & 2. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate. 3. Prepare any additional journal entry necessary for Tanner-UNF to report its investment in the December 31, 2021, 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, 2022, for $250 million. Prepare the journal entries required on the date of sale.

Answer 1

1) Journal entries
Particulars	Debit	Credit
investment in bond	290
discount on bond investment(290-260)		30
cash		260
2) journal entries to record the interest at effective market rate
particulars	Debit	Credit
cash (8%*6/12*290)	11.6
discount on bond	1.4
ineterest revenue(10%*6/12*260)		13
3) investment a/c in the balance sheet
particulars	Amount	Amount
investment in bonds		290
less : discount on bonds- original discount	30
less : amortization for the year ended 2021 dec 31	1.4	28.6
cost of investment		216.4
4) journal entries on sale of investment
particulars	Debit	Credit
cash	250
loss on sale of investment	1.4
discount on inestmement bonds(290-250-1.4)	38.6
investment in bonds		290

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