Question

Tanner-UNF Corporation acquired as a long-term investment $340 million of 6.0% 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 9% for bonds of similar risk and maturity. Tanner-UNF paid $310.0 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 $320.0 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 $300.0 million. Prepare the journal entry to record the sale.

Answer 1

1) Journal entries
Particulars	Debit	Credit
investment in bond	340
discount on bond investment (340-310)		30
Cash		310
2) jaurnal entries to record the interest at effective market rate
Particulars	Debit	Credit
cash (6%*6/12*340)	10.2
discount on bond	3.75
interest revenue(9%6/12*310)		13.95
3) investment a/c in the balance sheet
particulars	Amount	Amount
investment		340
less: discount on bonds- original discount	30
less: amortization for the year ended 2018 dec 31	3.75	26.25
cost of investment		313.75
4) journal entries on sale of investment
particulars	Debt	Credit
cash	300
discount on debtor	3.75
loss on sale of investment bonds(340-300-3.75)	36.25
investment in bonds		340