Question

Tanner-UNF Corporation acquired as a long-term investment $350 million of 7.0% bonds, dated July 1, on...

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"

Homework Answers

Answer #1

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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