Tanner-UNF Corporation acquired as a long-term investment $350
million of 7.0% 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 8% for bonds
of similar risk and maturity. Tanner-UNF paid $320.0 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 $330.0
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 $310.0 million. Prepare the
journal entry to record the sale.
Enter your answer in millions rounded to 1 decimal place i.e. 5,500,000= 5.5. If no journal entry is required select "No journal entry required"
Solution 1 & 2:
Journal Entries - Tanner UNF Corportation | ||||
Event | Date | Particulars | Debit (In Million) | Credit (In Million) |
1 | 1-Jul-18 | Investment in Bond Dr | $350.00 | |
To Discount on bond investment | $30.00 | |||
To Cash | $320.00 | |||
(Being investment in bond recorded | ||||
2 | 31-Dec-18 | Cash Dr ($350 * 7% * 6/12) | $12.25 | |
Discount on bond investment Dr | $0.55 | |||
To Interest revenue ($320*8%*6/12) | $12.80 | |||
(Being revenue recoginition for bond interest and discount amortized) |
Solution 3:
As bonds are classified under held to maturity therefore same will be reported in balance sheet at its amortized cost i.e. = $320 + $0.55 = $320.55
Solution 4:
Journal Entries - Tanner UNF Corportation | ||||
Event | Date | Particulars | Debit (In Million) | Credit (In Million) |
1 | 2-Jan-19 | Cash Dr | $310.00 | |
Discount on bond investment Dr | $29.45 | |||
Loss on sale of investment Dr | $10.55 | |||
To Investment in Bond | $350.00 | |||
(Being bond sold and loss recoganized) |
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