Question

Tanner-UNF Corporation acquired as a long-term investment $220 million of 4.0% bonds, dated July 1, on July 1, 2018. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Tanner-UNF paid $180.0 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, 2018, was $190.0 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. At what amount will Tanner-UNF 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 $160.0 million. Prepare the journal entry to record the sale.

Answer 1

Date	General Journal	Debit	Credit
July 1, 2018	Investment in Bonds	220
	Discount on Bond Investment		40
	Cash		180
2	Cash 220*2%	4.4
	Discount on bonds	1
	Interest Revenue 180*3%		5.4
3	Fair market value		190
	Book value	220
	Less: Discount(40-1)	39	181
	Increase in value		9
	Fair value adjustment	9
	Unrealized holding gain		9
4	Fair value	160
	Book value	181
	Decrease in value	-21
	Unrealized holding loss	21
	Fair value adjustment		21
	Cash	160
	Less:Fair value adjustment	21
	Less:Discount on bond investment	39
	Investment in bonds		220