Question

Tanner-UNF Corporation acquired as a long-term investment $260 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 $220 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 $230 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. 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 $200 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

1 & 2) Journal entries to record investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate is shown as follows:-

Journal Entries (Amount in million $)
Date	General Journal	Debit	Credit
1-Jul-18	Investment in Bonds	$           260.00
	Discount on Bond Investment (260-220)		$             40.00
	Cash		$           220.00
	(To record the investment in bonds)
Dec. 31, 2018	Cash (260 million*6%*6/12)	$               7.80
	Discount on Bond Investment (8.8-7.8)	$               1.00
	Interest Revenue (220 million*8%*6/12)		$               8.80
	(To record the interest revenue)

3) Journal entry to report its investment in the December 31, 2018, balance sheet.
Journal Entries (Amount in million $)
Date	General Journal	Debit	Credit
Dec. 31, 2018	Fair Value Adjustment [230 million - (220 million+1.0 million)]	$               9.00
	Net Unrealized holding gains and losses - I/S		$               9.00
	(To record the fair value adjustment)

4) Journal Entries to record the sale (Amount in million $)
Date	General Journal	Debit	Credit
2-Jan-19	Cash	$           200.00
	Loss on sale of investment (Bal. Fig) (260-200-39)	$             21.00
	Discount on bond investment ($40 - 1.0)	$             39.00
	Investment in Bonds		$           260.00
	(To record the sale of bonds)
2-Jan-19	Net Unrealized holding gains and losses - I/S	$               9.00
	Fair value adjustment		$               9.00