Question

[This is a variation of E 12–1 focusing on available-for-sale securities.]
Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July
1, 2018. 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. Company
management has classified the bonds as available-for-sale investments. As a result of changing market conditions,
the fair value of the bonds at December 31, 2018, was $210 million.

Required:
1. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2018.
2. Prepare the journal entries by Tanner-UNF to record interest on December 31, 2018, at the effective (market)
rate.

3. Prepare any additional journal entry necessary for Tanner-UNF to 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 $190 million. Prepare the journal entries necessary to record the sale,
including updating the fair-value adjustment, recording any reclassification adjustment, and recording the
sale.

Answer 1