Question

Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2018. Company management has the positive intent and ability to hold the bonds until maturity, but when the bonds were acquired Tanner-UNF decided to elect the fair value option for accounting for its investment. The market interest rate (yield) was 8% 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. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $210 million.

Required:
1. How would this investment be classified on Tanner-UNF's balance sheet?
2. to 4. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2018, interest on December 31, 2018, at the effective rate and fair value changes as of December 31, 2018.
5. At what amount will Tanner-UNF report its investment in the December 31, 2018, balance sheet?
6. 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 entry to record the sale.

Answer 1

Given: Tanner UNF corporation acquired Investment worth $ 240 million for $ 200 million at 6% yield. Tanner UNF decides to account the Investments on Fair Market Value basis. As on 31st December, 2018 the Fair Market Value for the Investments was $ 210 million.

1. Investments will be classified as HELD TO MATURITY in the Balance Sheet of the company.

2 to 4. Journal Entries:

a. 01st July, 2018 6% Bonds Held to Maturity A/c Dr. - $ 240 Million

To Profit and Loss A/c - $ 40 million

To Cash / Bank A/c - $ 200 million

(Being Investment purchased and profit being booked based on the Fair Market Value)

b. 31st December, 2018 Cash / Bank A/c Dr - $ 6 million ( $ 200 million * 6% * 6/12)

To Intereset Received for Bonds - $ 6 million

(Being Interest received for 6 months)

c. 31st December, 2018 Profit and Loss A/c Dr - $ 30 million

To 6% Bonds Held to Maturity A/c - $ 30 million

(Being Investment written down to its Fair Market Value)

5. Investment will be booked at the end of December, 2018 at $ 210 million.

6. Journal Entry for the Sale:

2nd January, 2018 - Cash / Bank A/c Dr. - $ 190 million

Profit and Loss A/c Dr. - $ 20 million

To 6% Bonds Held to Maturity A/c - $ 210 million

(Being investment sold and booking the loss)